Method and apparatus for enabling individual or smaller investors or others to create and manage a portfolio of securities or other assets or liabilities on a cost effective basis

ABSTRACT

A computer-based system is disclosed for creating a portfolio of assets and executing trades in the assets to modify the portfolio. An embodiment of the disclosed system includes a first processor interfaced with an investor&#39;s PC to select a plurality of assets to be in the investor&#39;s portfolio based on the investor&#39;s indicated preferences, to manage the portfolio in accordance with market changes and changes in the investor&#39;s indicated preferences, and to electronically place at least one asset trading order in accordance with the investor&#39;s indicated preferences. An embodiment of the system also includes a communication interface coupled to the processor and coupled to a plurality of other investors by which the processor electronically places the at least one order. Further, an embodiment of the system includes a central processor coupled to the communication interface, receiving a plurality of trading orders from among the plurality of investors&#39; PC&#39;s, and electronically forwarding the trading orders for execution to a third party.

RELATIONSHIP TO OTHER APPLICATIONS

This application is a continuation in part of U.S. patent applicationSer. No. 09/038,158 entitled “Method and Apparatus for EnablingIndividual or Smaller Investors or Others to Create and Manage aPortfolio of Securities or Other Assets Or Liabilities on a CostEffective Basis” filed by the same inventor on Mar. 11, 1998, which ishereby incorporated by reference as if repeated herein in its entirety,including the drawings.

BACKGROUND OF THE INVENTION

The present invention relates generally to methods and apparatuses forelectronically trading and investing in securities or other assets,rights or liabilities, such as commodities or futures. Moreparticularly, the present invention relates to a method and apparatusfor electronically trading over wired and wireless networks, includingover the Internet, and investing in securities or other assets, rightsor liabilities that enables a user, at a reasonable cost, to create andmanage a complex and diversified portfolio of such securities or otherassets, rights or liabilities.

Currently, small investors generally have two choices with regard tomaking investments in securities. First, they can acquire directlyshares or derivatives on shares (for example, buy 1000 shares ofMicrosoft or an option on Microsoft stock) or can acquire directly aderivative that derives its value from multiple securities (such as anoption on the Dow Jones Industrials). In this instance of directpurchases (through “brokerage”), the investor is the actual owner of theparticular security or derivative. (Where the investor owns a derivativesecurity, the investor generally has no ownership interest in theunderlying securities, which determine the value of the derivative).Second, these investors can purchase an interest in an intermediary(which interest could itself be a security), such as a trust,corporation or other business vehicle that derives its value frommultiple other securities (such as a trust that contains a portfolio ofstocks like the stocks that comprise the S&P 500, or a portfolio ofother stocks). This second category of intermediary products isprincipally comprised of open-end mutual funds (such as the Fidelity,Vanguard, Scudder and other mutual funds) that invest in othersecurities, but also includes closed-end mutual funds, unit trusts andother vehicles, and is referred to collectively herein as “funds.” Inthis second case where the investing is done through an intermediaryvehicle, the investor owns an interest in the vehicle. That vehicle inturn owns the underlying securities (as in a mutual fund). Each of thesetwo traditional investment strategies—either (i) trading individualsecurities or derivatives through brokerage, or (ii) investing infunds—has disadvantages for the investor, which are described below.

A. Chief Among the Structural Disadvantages Inherent in the Fund Productare:

1. Inability to Select Securities or Monitor Selection of Securities. Aninvestor in a fund is precluded from selecting the individual securities(or derivatives, which unless otherwise noted are hereinafter includedin “securities”) to be included in, or excluded from, the fund'sportfolio.

An investor can attempt to select the general type of securities to beincluded in the investor's overall asset allocation by investing in atargeted fund that, for example, states it will invest exclusively incompanies whose business is primarily computer software. But thatselection still provides the manager of the selected fund with widediscretion to select from hundreds of securities.

In addition, except for some targeted funds, it is not possible for theinvestor to express any preferences—even general ones—regarding matterssuch as social or moral issues (such as not wanting to, or only wantingto, invest in companies that engage in business with certain governmentsor have operations in certain sectors, such as defense). Even in thosefew instances where a targeted fund exists for those types ofpreferences, the preferences that the investor can have reflected are,at best, very general with the investor having no ability to selectspecific stocks, either to include or exclude, from the portfolio.

It is also not possible for the investor to control what specificsecurities a fund will hold in its portfolio, or with what weighting oramounts. An investor could select a fund that reflects, for example, anindex, but the fund then invests in whatever securities, and withwhatever weighting, comprises the index. Consequently, when the investorinvests in a fund, the investor may be investing in securities in whichthe investor would otherwise prefer not to have an interest, or not asmuch of an interest. In addition, an investor that invests in multiplefunds or that holds other investment securities other than solely onefund, will likely be overweighted or under weighted in particularindustries or stocks frequently without his knowledge, and without anymechanism to correct the allocation.

2. Inability to Control Tax Effects. An investor in a fund receivesordinary income distributions at the discretion (subject to certainlegal constraints), and depending on the management style, of the fund.Funds that churn portfolios generate more transactions than funds thatdo not, but the taxable distributions are dependent on the fund'sactivities—not the investor's.

In most funds, such as typical open-end mutual funds (which account forthe overwhelming bulk of all diversified investment vehicles with suchfunds holding a remarkable $4 trillion of investor money), net tax gains“flow through” to the investor. In other words, an investor is saddledwith whatever flow through tax gain the manager's activities havegenerated—and such gains are taxed at ordinary income rates. Theinvestor has no control over these effects whatsoever, and can be in aposition of having to pay tax on gains earned by the fund even where theinvestor has engaged in no transaction in the fund during the year.Moreover, taxable loses cannot be distributed by a fund—only taxablegains. Consequently, an investor can only receive a tax liability fromthe fund, not a tax benefit.

To attempt to avoid these problems, some investors with sufficientlylarge holdings to make it worthwhile can engage in complex taxstrategies to obtain some flexibility, but those strategies areexpensive to implement and not useful for smaller investors.

Alternatively, an investor can invest in a fund that attempts to limitthe fund's uncontrollable tax effects. For example, a fund that engagesin no selection of stocks—such as an index fund or a fund that simplyinvests in the largest 500 or 1000 corporations—would have littleturnover from a manager buying or selling securities in order to adjustthe portfolio's holdings. Even in these funds, however, there arepurchases and sales by the fund to reflect redemptions or cashcontributions by investors. As more investors buy into the fund, themanager buys more of the specified securities. As redemptions occur, themanager sells some of the securities to obtain cash to pay to the fundholders who are redeeming their interests in the fund. Consequently, ifthere was a net gain on those transactions, holders in these funds,which are generally tax flow-through funds, will receive a taxable gain,regardless of their desire. (While such a fund has net inflows ofinvestments from investors, there will be no or little tax effectbecause the fund will, almost exclusively, be acquiring securities. Whenthe fund eventually has net outflows, however, limiting the tax effectswill be far more difficult.)

3. Inability to Manage Tax Effects. Invariably, some securities in afund will have depreciated while the fund overall has appreciated (orvice-versa). It is not possible for the investor in an appreciated fundto make the choice to obtain a capital loss by selling depreciatedsecurities (and the fund itself cannot pass through losses). Conversely,it is also not possible for an investor to make the choice to obtain acapital gain by selling the appreciated assets in a fund that hasdepreciated overall. Those transactions in particular securities aremade at the discretion of the fund manager for the fund as a whole andaffect all investors in the fund.

In those few types of diversified investment vehicles where the taxeffects do not flow through, the investor does not obtain any gain orloss from the appreciation or depreciation in the underlying assets. Theinvestor can only sell part or all of his interest in the entire fund,which will either result in a gain or a loss depending on whether thefund has appreciated or depreciated as a whole relative to theinvestor's tax basis in the fund.

In all instances, flow through or not, the investor cannot sell some ofthe securities in the fund, and therefore has no ability to manage forhis own benefit the various tax effects that originate from theunderlying securities in the fund.

4. Inability to Exercise Shareholder Rights or Rights RegardingReinvestment or Distributions, Etc. As noted, securities held in a fundare owned by the fund, not the investor who merely holds an interest inthe fund. Consequently, the investor in a fund has no right to vote theunderlying securities, tender (or not tender) them in a takeovercontest, elect to receive a reinvestment of dividends, elect to receivea dividend as stock instead of cash, exercise any preemptive rights, orotherwise exercise any other shareholder franchise or other shareholderright that may exist with regard to the securities held in the fund.

5. Inability to Modify or Control Costs. With funds, there are two typesof charges: Charges levied upon an investor directly for buying, sellingor holding interests in the fund, and charges levied against the fundfor managing, advising and providing other services to the fund.Although an investor may be in a position to regulate to some degree thecharges directly incurred, either by buying or selling less frequently,or by buying directly from a fund as opposed to through a broker orother intermediary (such as a bank or insurance company) that charges afee or load, the investor cannot affect or control the charges leviedagainst the fund. Those charges which frequently are based on apercentage of assets under management, are paid by the fund and serve toreduce the returns, or increase the losses, of the fund.

6. Inability to Make Intra Day Modifications. An investor in a fund canmake only one investment decision—namely to buy or sell interests in thefund. Because of the structure of open-end mutual funds (theoverwhelmingly dominant type of fund), that decision is effective onlyonce per day. For example, an investor who believes the market is goingdown, or who believes it may be going down during the morning but thenbelieves it is going up in the afternoon has no mechanism, through anopen-end mutual fund, to buy based on intra-day prices. All open-endmutual funds are priced as of the close of business—in fact prices areavailable for such funds only once per day; and all investors—whetherbuying or selling and regardless of when their order was placed duringthe day—receive a price as of the close of business. This lack ofexecution flexibility is an important consideration for some investorsand one that forces them to use brokerage or other vehicles as opposedto mutual funds for their investing.

Certain funds other than open-end mutual funds, such as closed-end fundsor some trusts, as well as derivative securities, do trade during theday and therefore can reflect intra-day price movements. Each of theseother vehicles, however, has negative characteristics that have madethem unpopular with investors, including discounts to fair market valueof the underlying securities, less transparency than open-end mutualfunds or relatively unchangeable, static portfolios, and they are notgenerally viewed as substitutes for an open-end mutual fund. Inaddition, in these vehicles as well, the investor buys or sells only aninterest in the fund, not the securities owned by the fund.

7. Inability to Monitor and Control Risk Levels and “Styles” ofInvesting. An investor in a fund can receive historical information asto risk and returns for the fund. Mutual funds that are activelymanaged—as opposed to passively managed indexed funds or staticportfolio trusts—are managed by individuals, and frequently by teams ofindividuals, making buy and sell decisions. When some of thoseindividuals depart the fund, the “style” of investing of the fund maychange. Even if those individual managers never depart the fund, themarket may present them with fewer or greater opportunities to buy orsell securities under a particular “style” than they had before. Ortheir views as to the market may change and with it their investmentmix. Some investors in these funds accept these changes in style anddirection and view that as part of what they are paying for with themanagement fee. Others, however, attempt to select funds based on thefunds supposed risk, sector of interest and other factors (includingprevious returns or returns relative to an index). It is not possible tocontrol those factors in these funds in advance, however, unless thefund commits to a mechanical style of investing with extremely limiteddiscretion—which is typical for an index fund but very rare for anactively managed fund.

8. Inability to Switch Fund Families or Funds Without Consequences.Because funds are organized and managed by particular investment companyadvisers, they are proprietary to a particular fund complex.Consequently, if for example, an investor were in invested in a FidelityS&P 500 fund and wished to switch to a Vanguard S&P 500 fund because,for example, the fees were lower or because for example the investorswitched jobs and her employer was offering Vanguard instead ofFidelity, then the investor would have to sell all her interest in theFidelity fund and buy an interest in the Vanguard fund. Unless theinterests were held in tax advantaged accounts like a 401(k) account,that transaction would be taxable. Indeed, even switching from oneFidelity fund to another Fidelity fund is taxable (unless the interestswere held in tax advantaged accounts).

9. Inability to Manage Multiple Investments as a Whole. When an investoris invested in multiple funds, it is very difficult for the investor tounderstand the overall portfolio characteristics of their investment. Inother words, many investors may have one or a few investments in fundsin 401(k) or other retirement accounts, and then a few other fundinvestments or individual stock investments outside of their retirementaccounts. These investors generally do not manage their overallportfolio of multiple funds and individual stock holdings as a wholemanaged portfolio, because it is very difficult to discern the overallrisk and return of the integrated portfolio of multiple funds andindividual stocks. Of course, it is that integrated portfolio that will,ultimately, provide returns for the investor. Some investors pay to havemultiple funds managed by investing in “funds of funds” that attempt todo that for them. Even here, the investor's portfolio does not include,for purposes of determining whether the investor's overall portfolio isbeing managed well, those funds that are not part of the “fund of funds”complex, or individual stocks held by the investor.

B. Chief Among the Structural Disadvantages Inherent in the BrokerageService are:

1. Inability to Create a Diversified Portfolio on a Cost EffectiveBasis. Under portfolio theory, an investor should seek to create adiversified portfolio when investing. Diversification provides aninvestor with a similar return with lower risk, or a higher return withthe same level of risk, as a non-diversified portfolio. Simply put,portfolio theory dictates that there is no advantage to an ordinaryinvestor in holding a non-diversified portfolio of publicly-tradedsecurities as opposed to a diversified portfolio. Nevertheless, fewsmaller investors are able to create a diversified portfolio. Theobstacles to creating such a portfolio for the smaller investor havebeen the inability of the ordinary investor to be able to craft such aportfolio on his own, combined with the costs of engaging in the tradingnecessary to create and maintain such a portfolio, and the inability toconsummate trades in small quantities needed to create such a portfolio.Consequently, most investors who have understood the benefits, or atleast understood that there is a benefit, from diversification haveturned to mutual funds. And that desire for diversification has been aprimary factor in the explosive growth of such funds, notwithstandingall of the disadvantages of investing in mutual funds as describedabove. Simply put, the concept underlying brokerage has been theselection of individual stocks, not the creation of an interactingportfolio of securities (something which has been left to the funds).

Costs: The costs for an individual or smaller investor, or an investorseeking to invest a smaller amount, in attempting to create and maintaina diversified portfolio stem, in part, from the cost of brokerage. Aninvestor buys or sells individual securities by employing a broker. Thebroker purchases the selected securities for the investor directly orfrom a dealer or on an exchange. The costs to a retail investor ofpurchasing or selling a security are reflected in charges that fallgenerally into two categories. (For larger institutional orders, thesetwo costs generally are far lower on a percentage basis relative to theinvestment as compared to a smaller order, but there are significant,additional other costs to these larger orders stemming, for example,from the market impact of the order itself—in other words the ability ofthe existence of a very large buy or sell order to affect the price atwhich the order will be effected by moving the applicable bid-askquotes. Other systems (the OptiMark™ trading system, ITG-Posit, notedbelow) have attempted to address this problem for these largeinstitutional investors.)

The first set of costs are those charged directly to the investor in theform of the broker's trading commission and fees. The second are chargeslevied upon the transaction itself (in terms of a “mark up” or “spread”)between the cost at which the security was acquired by the dealer or theexchange specialist from another investor and the cost of the securityas it is sold to the investor. This is a cost that frequently is“hidden” from investors: Investors do not always realize that there is,frequently, a spread even when they are being charged a commission. Butit can be a significant cost—even exceeding by multiples the explicitcommission charges.

Through technology, increased efficiencies and productivity,competition, etc., these costs have been decreasing over time.Nevertheless, all in all costs (including the mark-up or spread) arestill on the order (for the deepest discount broker and for the smallestround-lot of 100 shares) of at least tens of dollars per securitytraded. This is true even where the explicit commissions have beenreduced, in some cases to zero, because the broker-dealer is extractinga high “spread” from the investor that the investor usually is not awareof. Moreover, the current view is that the costs have reached a pricefloor, and without new systems for engaging in trading, such as thepresent invention, the costs will not be reduced much further.

To create and maintain a diversified portfolio of individual stocks, aninvestor would have to purchase at least twenty to fifty stocks, and bein a position to add to that securities portfolio on a proportionatebasis as new dollars are received to make additional investments, and tore-balance the portfolio periodically as the markets and the securitieschange. In other words, an investor would first have to create adiversified portfolio by purchasing say fifty stocks, and then continueto purchase stocks in appropriate proportions with any additionalamounts sought to be invested on, say, a monthly basis, and alsore-balance the portfolio periodically. Obviously, the basic brokeragecosts—even employing the deepest discounted brokerage services—would beprohibitive for the ordinary investor. For example, to create andmaintain a diversified portfolio, an investor seeking to invest $2,000per month (a relatively high amount for the ordinary investor), wouldlikely incur minimum all-in transaction costs for an initial fifty stockpurchase of at least (and this would be optimistic) $500—or fully 25% ofthe initial invested amount. Such charges are obviously prohibitive.

The best that an investor can do with $2,000 per month to invest whodoes not wish to invest in a fund or a derivative product would be totry to build such a portfolio for lower costs by buying one or twoseparate stocks each month and thereby, over a number of years, create adiversified portfolio. Such a strategy has a number of drawbacks as wellas taking years to implement. An investor could also add to an alreadydiversified portfolio for a lower cost by making subsequent monthlypurchases of just one or two stocks. The drawbacks in terms of lack offlexibility, inability to modify the portfolio, etc.—all similar to theproblems with a locked-in portfolio stemming from a mutual fundinvestment—exist with this strategy as well. Only with investmentsapproaching $10,000 per month—a prohibitive level for mostinvestors—could these costs even begin to be viewed as non-prohibitiveon a recurring basis. Furthermore, smaller investors with limited fundsto invest are biased, as a practical matter, towards stocks whose valueare low, i.e., $10-20 per share (which for a round lot would be$1,000-2,000) as opposed to $100-200 per share (which for a round lotwould be $10,000-20,000), thereby limiting the possible selection ofstocks.

As a practical matter then, brokerage costs and constraints eliminatethe possibility that the ordinary investor can create and maintain adiversified portfolio on his own—as opposed to through a fund, even werethe investor to have the tools and skill to be able to do so.

Capability. In addition to prohibitive costs, ordinary investors possessneither the skills nor the tools necessary to create and maintain adiversified portfolio with desired risk-return characteristics. Tocreate such a portfolio, an investor needs to understand risk as it isdefined from the perspective of portfolio theory, and have the data andthe mechanism for analyzing the data to employ the theory. That datathen needs to be correctly employed in connection with a trading systemto allow for the cost effective creation and maintenance of theportfolio. There is no brokerage (or other system) that deploys, usesand otherwise acts upon the necessary diversification information,combined with a trading system, so as to be accessible by an ordinaryinvestor. There are, and have been a variety of systems (for example,Schwab One Source (www.schwab.com), Financial Engines(www.financialengines.com) and a new Microsoft site(http://beta.investor.com)) that provide advice to investors as to thecreation of a portfolio of mutual funds based on, among other things,risk, style, performance, and ratings. These systems, however, are notdesigned to enable investors to purchase a portfolio of specificsecurities (as opposed to assisting in the purchase of a few, specificmutual funds, with all the attendant disadvantages of holding mutualfunds) in a cost effective manner, or hold fractional shares insecurities (as opposed to interests in funds), or obtain any of theother advantages stemming from the ability to invest directly insecurities as opposed to funds, all as mentioned above and discussedfurther below.

2. Inability to Purchase Small and Fractional Share Interests. It ispossible to acquire small and fractional interests through specificdividend reinvestment plans direct from certain issuers. These plans,however, are run by selected issuers and have a number of significantlimitations, including, for example, average pricing usually over thecourse of weeks or a month.

Purchasing or selling a security through an ordinary brokerage requirestransactions to be effected in minimum units of whole numbers. In otherwords, an investor can purchase no less than 1 share of IBM or sell noless than 1 share of General Motors, and purchases or sales must bewhole numbers such as 27 shares, as opposed to 27.437 shares. Inaddition, costs are frequently prohibitive for small transactions in asecurity (such as 1 or 2 shares) or even for transactions in less than around lot (100 shares). An investor buying a round lot in the ordinarysecurity trading between $20 and $40 would be buying at least $2,000 to$4,000 worth of the security. Buying 50 round lots to create adiversified portfolio requires a greater investment ($100,000 to$200,000) than most investors are able to make. As a specific example,then, an investor wishing to invest $150 per week could, through anordinary brokerage, at best buy 7 shares of a $20 stock, or 3 shares ofa $40 stock, invest the balance in cash, and wait for the next week tobuy a different stock or more of the same stock. But at a brokerage costof, say, just $5 per security traded, the brokerage costs would rangefrom $15 to $35 (a prohibitive 10% to over 23% of the amount to beinvested). This is not a practical alternative. The only alternativethat has been reasonable to date for an investor in this position hasbeen to invest in a fund.

3. Inability to Select Individual Securities Reflecting Preferences tobe Included Within a Diversified Portfolio. Using a broker, anindividual or smaller investor, or a person investing a smaller amount,obviously can select individual securities for purchase and sale.Ordinary brokerage, however, does not provide a mechanism forreadjusting an entire portfolio of holdings as a unified portfolio ofinvestments. Consequently, most investors are likely to be overweightedin a particular security or sector because of the costs ofre-configuring their portfolio and an inability to determine the overallprofile of the portfolio. Even if the overall risk and other profilecharacteristics are determined, the investor would usually not be in aposition to act to make the portfolio diversified because of the costissue described above.

Moreover, ordinary brokerage frequently does not provide assistance toan investor regarding other factors related to a company, such associal, moral or political considerations that would affect theinvestor's choice of whether to buy or sell the company's stock.

4. Inability to Obtain Superior Trade Executions. Brokers generallyexecute trades when received, thereby providing “immediate” executions.There are exceptions, however. For example, a trade can be a “limit”order meaning that it can be executed only at a specific price orbetter. Limit orders are generally executed immediately whenever theprice reaches the limit. Trades can also be set for execution at the“open” or “close,” meaning the trade will be executed as part of theopening or closing call auction procedures, or upon the satisfaction ofcertain other conditions or at certain other times as the customer mayspecify.

As a general matter, under applicable regulatory requirements, customersare required to receive what is called “best execution.” But thatexecution may not be the best price they could have received if theexecution system were different. There is frequently a trade-off betweenprice and liquidity. If a customer seeks immediate execution, then theprice may be somewhat less advantageous to the customer than if thecustomer is willing to wait. In addition, if the customer is willing todelay the attempt to execute the order until there are multiple otherorders, then the customer could again obtain a better execution becausethere will be a greater concentration of order flow against which to tryto match the order. A number of specialized brokers (and other tradingsystems) currently permit institutions to hold order flow and try tomatch the held orders at various times. In addition, many brokers sendorder flow to others, such as market makers or exchanges, whoconcentrate order flow so that purchases can be better matched againstsales, thereby providing price improvement or better executions thanmight otherwise occur.

There are trading systems that attempt to obtain improved tradingperformance for their customers, but these systems serve exclusively asvarious forms of “matching” mechanisms (although sometimes with verycomplicated algorithms) that seek to match buy and sell orders. Theyhold order flow over time or in accordance with specified preferences,such as the Arizona Stock Exchange, which runs periodic call auctions;ITG-Posit, which operates a crossing system that matches buy and sellorders five times a day; and the OptiMark™ trading system, which matchesbuy and sell orders according to various algorithms. In addition, thesesystems primarily, although they need not necessarily, cater toinstitutions and have not been made available to the individual orsmaller investor (although they could be). In any event, as describedmore fully below, they do not provide the missing capabilities discussedabove.

5. Failure to Monitor Portfolio Based Tax Effects. Although brokersobviously could monitor the overall tax effects of a portfolio for theircustomers, they generally do not. The concept behind brokerage isusually the selection of individual stocks for purchase or sale, not thecreation and maintenance of a diversified portfolio. Consequently,recordation of basis and monitoring gains and losses of securities—ascomponents of a portfolio as opposed to as individual investments—wouldbe unusual and is generally not available in most standard brokerageaccounts. If a customer does obtain that advice, if it is available atall from the broker, it is usually expensive.

6. Failure to Assist in Exercise of Shareholder Rights. Similar to theproblem with tax effects, brokerage is designed to provide assistanceregarding individual security transactions, not other matters.Consequently, investors are forwarded materials such as proxy statementswithout any advice or direction from the broker.

7. Failure to Limit Portfolio Characteristics. Currently, brokerage ispermitted in some self-directed retirement accounts established byemployers (such as 401(k)s), but not permitted in many. The reason, inpart, is that employers are concerned that employees, especiallysomewhat less sophisticated employees, will not fully appreciate therisks of investing and may invest in too risky a security, or not asufficiently diversified portfolio, and therefore potentially lose muchor all of their expected retirement. Consequently, employers limit thechoices that employees may select by offering them a limited number ofinvestment choices, which because employers want to providediversification within each investment vehicle so offered has generallymeant, almost exclusively, various types of funds. Brokerage has notbeen offered because there was no way to ensure that an employee wouldinvest in a diversified portfolio with specified maximum risk levels(hence the practice of forcing employees to invest in selected funds).

Previously Existing Systems

Electronic trading systems are known. The OptiMark™ trading system is asystem that allows large institutional investors and others who areconcerned about potentially moving the market by placing large orders toplace such orders with minimized market impact. It is premised on theconcept of a trader having a utility preference function for aparticular transaction. As an example, the OptiMark™ system works byhaving a trader specify how much above the current equilibrium price heis willing to pay to purchase a block of securities. The system thenattempts to match that trader's transaction preferences with anothertrader's preferences in order to complete a trade. The OptiMark™ tradingsystem therefore engages in price discovery.

ITG-Posit is an electronic equity-matching system that lets investorsfind the other side of a trade during the market day. Posit utilizesmid-point pricing. Buy and sell orders, including individual stocks andportfolios, are entered into the system; five time daily, Positprocesses and compares the orders. Posit trades are then priced at themidpoint of the bid/offer spread (the difference between the bestseller's asking price and the best buyer's bid) in the stock's primarymarket when the match is run. Those orders which match are executed.Investors can keep unmatched orders in the system for future matches orcan electronically route the order to any one of the primary or regionalexchanges, to OTC market makers, or complete the order on an agencybasis. Posit is used by major institutions and broker/dealers. Posit,like the OptiMark™ trading system, is in essence a matching system butPosit matches trades at the mid-point (as determined by a third partysystem) without independent price discovery. It is premised on traderswishing to trade with each other and provides such traders a potentiallybetter execution (because of the mid-point cross) with lower marketimpact (because of the anonymity of the trades and the increasedavailable liquidity based on the concentration of trades within certaintime frames).

The New York Stock Exchange and the NASDAQ market also both aggregateorder flow at the open and the close of the exchanges to match orderflow and, of course, concentrate order flow during the day by limitingthe number of persons who can trade a security (one specialist per stockon the New York Stock Exchange so that order flow at the Exchange in aparticular stock moves through that one specialist, and to “marketmakers” on the NASDAQ, so that all order flow on the NASDAQ is focussedon the market-makers).

Schwab, Financial Engines (and perhaps Microsoft) provide services thatassist investors (such as a participant in a 401(k) plan) in selecting amutual fund or creating a portfolio of mutual funds by selecting fromamong a group of mutual funds available to the participant based onrisk/return and other factor analysis. Once the analysis is complete,the participant then selects mutual funds for his portfolio according towhat is permitted by his participation rules (if it is a 401(k) plan) orthrough brokers or others offering the funds. Although for FinancialEngines and Microsoft there currently is no direct mechanism foractually executing the desired purchases of fund interests, Schwab doesmake available the ability to purchase interests in the funds directlythrough Schwab. There is no mechanism, however, for enabling theparticipant to select, craft, modify and execute a portfolio comprisingindividual equities: Such an investment in equities is a completelydifferent form of investment from an investment in funds where, beforethe present invention, it has not been possible for a smaller investorto acquire or trade individual equities in small or fractional amountson a cost-effective basis or to manage individual equities as anintegrated portfolio as opposed to a series of individual investments.

Portfolio (or cash) management accounts and similar vehicles exist andare offered by a number of brokerages. They are somewhat mislabeled,however, in that they do not manage portfolios of securities, but simplycombine in one reporting statement information regarding various typesof assets held by a customer (funds, stocks, bonds, cash, etc.) andconsolidate broker relationships. These accounts primarily involvelinking of various types of services including credit card, loan,checking/savings, brokerage and mutual fund holdings.

Programs and databases exist that provide raw information regardingvolatility and other indicia relative to individual stocks andmechanisms for investors to screen stocks to obtain a list of thosestocks that meet certain profiles or parameters.

Systems exist that allow a user to screen the portfolios of certainother parties, primarily certain investment managers that file documentswith the Securities and Exchange Commission. These systems do not createmechanisms for investors of a system to screen characteristics of otherinvestors of the system (such as patent lawyers or individuals makingmore than $75,000) to obtain a composite portfolio or a portfoliocomprising composite characteristics of these other investors. Systemsexist that are designed to create derivatives and futures that permitinvestors to obtain the market risk economic benefits of a portfolioinvestment similar to that of the current invention. These systems,however, are not currently permitted in the United States for regulatoryreasons, introduce credit risk related to the issuer of thederivative/future, provide for different and adverse tax consequencescompared to those offered by using the current invention, do not providefor the exercise of shareholder rights, do not permit the selection ofparticular stocks reflecting non-economic preferences (such as“no-tobacco”), and generally do not substitute at all for the currentinvention.

Some mutual fund complexes have made available to their customers theability to screen mutual funds and determine which fund best fitscertain parameters that they make available that a customer would likesatisfied—and then lets the customer invest in that mutual fund. For theinvestor, this system again suffers from all the disadvantages ofinvesting in mutual funds—as opposed to the underlying securities—asdescribed above.

Some systems, like Financial Engines, provide tools for investors toselect a number of mutual funds to satisfy certain investment goals.These systems do not provide tools to select a portfolio of individualstocks that, as a portfolio, would satisfy certain investment goals.Moreover, the systems that exist that review mutual funds do not reviewor analyze mutual funds in combination with individual securities, whichis more likely reflective of the actual overall investments held by asmaller investor.

The present invention is therefore directed to the problem of developinga method and apparatus for enabling an individual or smaller investor,or an investor investing a smaller amount, to create and manage, on acost-effective basis, a complex portfolio of securities.

SUMMARY OF THE INVENTION

The present invention solves the problem of individual or smallerinvestors (which includes investors investing a smaller amount andcollectively referred to herein as “investors”), creating and managingon a cost-effective basis a complex portfolio of securities. The presentinvention does this by providing a computer-based system to which theinvestor provides his preferences, which system generates a portfoliothat reflects the investor's preferences or assists the investor inselecting a portfolio, allows that portfolio to be modified by theinvestor as a whole portfolio and allows the investor to direct that theportfolio or specified individual securities in the portfolio bepurchased or sold or modified as a portfolio transaction. The systemfurther aggregates orders generated by other investors at various timesduring the day for execution, and includes a device for such executionwith investors being allocated specific interests, including smallnumbers of (and fractional shares, if needed in) securities. The systemfurther nets the various transactions so aggregated to provide evenbetter execution and even lower costs.

According to one aspect of the present invention, a system for enablingmultiple individual or smaller investors to create, manage and trade aportfolio of assets/liabilities includes a processor and a storagedevice. The processor communicates with the investors via multiplecommunication links, and receives investor identification informationand preferences and trading data from each of the investors. Theprocessor aggregates all buy or sell orders and all otherwiseeconomically unviable buy and sell orders for each asset/liability inthe trading data from each of the investors to obtain a singleeconomically viable buy order and a single economically viable sellorder for each asset/liability. (As used herein, economically unviableorders include fractional shares, odd lots, and small amounts of sharesthat cannot be normally traded, or cannot be normally traded on acost-effective basis.) The processor then transmits the singleeconomically viable buy order and the single economically viable sellorder to a third party for execution. The storage device is coupled tothe processor and stores the trading data from each of the investors.

In addition, the processor creates a percentage allocation of investmentclasses for each investor based on allocation model input from eachinvestor and transmits a resulting percentage allocation of investmentclasses to each investor. Furthermore, the processor interacts with eachinvestor to determine an investor portfolio that corresponds to thepercentage allocation of investment classes for the investor. Theprocessor includes in determining its allocations any investmentscurrently held by the investor, including investments in mutual funds orother funds as well as already owned individual securities, and includesthese investments for the purposes of determining the overall portfoliocharacteristics of the investor's investments.

One particularly advantageous embodiment of the above system includes anelectronic payment mechanism coupled to the processor and for couplingto a third party electronic payment system. The electronic paymentmechanism transmits a request for an electronic payment for each of theinvestors to the third party payment system, and receives, in responseto the request, electronic payment data for each of the investorselectronically from the third party payment system. In addition, theelectronic payment mechanism maintains multiple payment accounts, onefor each of the investors. Furthermore, the electronic payment mechanismonly permits trading of the assets/liabilities for a particular investorif the particular investor's payment account contains a predeterminedamount. Moreover, the storage is coupled to the electronic paymentmechanism and stores the electronic payment data for each of theinvestors, and the payment accounts for the investors.

Further, the system of the present invention can include a secondcommunication link to a third party trading system via which theprocessor transmits the single buy order and the single sell order foreach of the assets/liabilities.

In addition, the system of the present invention optionally includes aninvestor program executing on an investor's personal computer, whichprogram prompts the investor for investor identification information andinvestor preferences, transmits investor identification and investorpreferences to the processor, and enables the investor to interact withthe processor to select multiple assets/liabilities to create aninvestor portfolio commensurate with the percentage allocation ofinvestment assets. The investor program can include a graphical investorinterface displaying a risk and a differential return of the entireinvestor portfolio relative to standard industry measurements to theinvestor and on absolute scales. Also, the investor program enables theinvestor to adjust the percentage allocation of investment assets andthe investor portfolio. Moreover, the investor program communicates tothe processor as trading data via one of the communication linksinvestor identification information along with any trades ofassets/liabilities to be executed to create or modify an investor'sportfolio to ensure an investor's actual portfolio matches an investor'sdesired portfolio.

According to one aspect of the present invention, the system stores theinvestor program in the storage facility and upon request by a newinvestor transmits the program to the investor.

According to another aspect of the present invention, the electronicpayment mechanism electronically requests periodic payments from thethird party payment system for each of the investors. One possibility isthat the periodic payment is a monthly payment or a weekly payment.

According to another aspect of the present invention, unlike alltraditional brokerages that charge a commission or a fee based on a pertransaction basis, or that receive their compensation (including itemslike payment for order flow) on a per share or per trade basis becausethey make their money from investors trading, the investor under thepresent invention can be charged a flat periodic fee (such as a monthlyor annual fee as might be charged by certain financial planners) or anasset based fee comprised of a certain amount of the assets held in thesystem (such as are usually charged by mutual funds), or a combinationof such periodic and asset based fees, or a combination of such fees anda transaction based fee.

According to yet another aspect of the present invention, the tradingdata can include fractional shares of the assets/liabilities desired tobe traded.

According to yet another aspect of the present invention, the investorprogram maintains tax basis information, including date of acquisition,for all of the assets/liabilities traded by the investor. The investorprogram can also provide information to the investor regarding votingrights of the assets/liabilities held by the investor.

According to one aspect of the present invention, the processor receivesactual trading pricing information regarding the single buy order andthe single sell order for each of the assets/liabilities from the thirdparty trading system. The processor then transmits the actual tradingpricing information regarding each asset/liability traded by aparticular investor to the particular investor. In response to theactual trading pricing information received by a particular investor,the investor program modifies the display of the risk and differentialreturn of the entire investor portfolio in accordance with the actualtrading pricing information regarding each asset/liability traded by theinvestor. Based on this information, the investor program recommendsmodifications to the investor portfolio to the investor via thegraphical investor interface to make the investor portfolio match thepercentage allocation previously determined if the investor portfolio nolonger matches the percentage allocation as a result of the actualtrading pricing information received from the processor.

According to another aspect of the present invention, at least one ofthe communication links to the investor includes a communication link tothe Internet. Furthermore, the system can include a graphical investorinterface displayed on a predetermined world wide web site via which anew investor can provide investor identification information to thesystem. In this case, the processor upon receipt of investoridentification information from a new investor accesses the new investorvia one of the communication links in accordance with the investoridentification specified by the new investor to obtain paymentinformation from the new investor. This communication link can include adirect dial telephone connection, a direct dial-up telephone connectioninitiated by the investor, a direct dial-up telephone connection to anintermediary server, which direct dial-up connection is initiated by theinvestor, and a network connection from the intermediary server to theprocessor initiated by the intermediary server, a first direct dial-uptelephone connection to an intermediary server, which first directdial-up connection is initiated by the investor, and a second directdial-up connection to the processor, which said second direct dial-upconnection is initiated by the intermediary server.

According to another aspect of the present invention, a personalcomputer based program for executing on an investor's personal computer,for enabling an investor to create, manage and trade a portfolio ofassets/liabilities and for interfacing with a system for managing aplurality of such investors via a first communication link over whichthe investor transmits to the system trading data regarding trades of atleast one asset/liability that the investor desires to make, includesthe following elements. A graphical investor interface prompts theinvestor for investor identification information, and investorpreference data. An asset allocation modeling process creates apercentage allocation of assets for the investor based on the investorpreference data, wherein the graphical investor interface displays viathe computer display multiple assets/liabilities among which theinvestor can select to create an investor portfolio commensurate withthe percentage allocation of assets. A risk and differential returncalculation process calculates a risk and a differential return of theentire investor portfolio relative to standard industry measurements orabsolute values, and provides the relative risk and differential returnto the graphical investor interface, which displays the relative riskand differential return to the investor. A portfolio editor processenables the investor to adjust the investor portfolio. A communicationprocess communicates the investor identification information along withany trades of assets/liabilities to be executed to create or modify aninvestor's portfolio to ensure an investor's actual portfolio matches aninvestor's desired portfolio to the system as said trading data via thefirst communication link. In this program, the graphical investorinterface can display the relative risk and differential return as acolor code, a numerical indicator, an arrow on a dial, or an arrow on arange of numerical values or an arrow on a horizontal or vertical scale.

According to another aspect of the present invention, the system permitsthe investor to adjust the color code, the numerical indicator, thearrow on a dial, or the arrow on a range of numerical values or thearrow on a horizontal or vertical scale, by moving a slide or otherindicator on the graphical investor interface, and by so doing changethe requested risk and return levels for the investor's preferredportfolio. Consequently, the investor can adjust the characteristics ofthe portfolio directly by changing the position of the indicator, andthe system will then store the changed requested characteristics andselect securities for inclusion or exclusion in or from the portfolio,or the weighting of such securities in the portfolio, based on matchingthe portfolio characteristics so selected by the investor with theportfolio characteristics of the investor's portfolio of securities. Inthis instance, the system will recommend or suggest to the investor thesecurities that should be included in the investor's portfolio thatsatisfy the investor's risk and return selections, combined with anyother selections or preferences that the investor may have.

According to another aspect of the present invention, the systemincludes, in its differential risk and return calculations, securitiesand other investments, including funds, held by the investor that werenot acquired through the system but that the investor notes or describesto the system, in determining the overall portfolio characteristics andin making recommendations or suggestions to the investor as to whatother securities should be included in the investor's portfolio.

According to another aspect of the present invention, the system permitsa sponsoring organization, such as an employer, to specify that all theinvestors in the system of that sponsoring organization (such asemployees in the employer's 401(k) plan) may invest using the system,but that their portfolio must all times meet certain specifications. Thespecifications could include a minimum number of stocks (such as 30), amaximum concentration in any particular stock (such as 5%) and a maximumrisk level (such as no more than 10% more risky than the market asdefined by the S&P 500 risk level). Similarly, the head of a householdcould establish investing accounts for members of the household withsimilar constraints or whatever other limitations along similar lineswere desired.

According to another aspect of the present invention, the programincludes a configuration control process that provides a version numberof the program to the system in response to a request from the system,wherein the system downloads an updated version of the investor programupon detection of an out of date version.

According to another aspect of the present invention, a method forcreating and managing a portfolio of assets or liabilities by performinga plurality of transactions, includes the steps of: a) obtaininginvestor preferences for portfolio characteristics of an investor; b)employing the portfolio characteristics to describe and select assets orliabilities to be transacted in multiple transactions by an investor;and c) aggregating the transactions of a single investor with thetransactions of other investors over an applicable characteristic of theassets or liabilities. In this case, the transactions can be aggregatedover a time, such as every three hours, once per day, or multiple timesper day at predetermined times. Once the transactions are aggregated,they are then executed.

According to another aspect of the present invention, the method caninclude the step of netting the transactions against the transactions ofother investors after aggregating the transactions, and then executingany remaining transactions after netting.

According to yet another aspect of the present invention, an apparatusfor enabling a plurality of investors to make periodic investments in aportfolio of securities includes a processor and a storage device. Theprocessor receives data from each of the investors regarding amounts ofmoney to be invested in each investor's portfolio, and accesses anelectronic payment system upon receiving instructions from an investorto purchase securities to obtain payment for the required purchases. Thestorage unit stores each investor's portfolio. This apparatus canoptionally include a third party trading system interface device thataggregates all investors' trades and sends the aggregated trades as asingle trade in each security to a third party trading system, whichorders can optionally-be netted before sending them to the third partytrading system.

The present invention also permits the collection of securities intopre-packaged portfolios that, if acquired by an investor, provide theinvestor all the advantages described before of directly owning theunderlying securities while having a portfolio that reflects somestrategy or preference determined by some other means. For example, acurrently popular strategy is to invest in the ten of the thirty stockscomprising the Dow Jones Industrial Index that have performed the mostpoorly in the past calendar year. The expectation is that these tenstocks will then outperform the index in the succeeding calendar year.Consequently, currently, investors wishing to follow this strategygenerally purchase an interest in a unit investment trust. Each year thetrust liquidates and an investor wishing to continue the strategy mustpurchase a new interest in a new trust in the next year. These trustsnormally carry maintenance fees and are sold by brokers who charge asignificant load for acquiring the trust unit. Moreover, the unit isdictated by the sponsor. If an investor wanted to buy the nine, insteadof ten, stocks that most under performed, there is currently no goodmechanism for doing so. In addition, the investor owns an interest inthe trust, which has many of the same negative characteristics as afund, described above. Therefore, according to yet another aspect of thecurrent invention, the investor could simply click on a button on thegraphical investor interface and receive a proposed portfolio consistingof a selected grouping of securities like the ten under performingstocks in the Dow Index. The investor could then keep that portfolio assuggested, or modify that portfolio if desired by eliminating one of thestocks (to create the nine aforementioned) or by adding another tocreate eleven, or by modifying the relative weightings of the ten etc.The portfolio would then be acquired for the investor just as if theinvestor selected the securities to be included in that portfoliothrough other means. In addition, the portfolio that is pre-packaged asa starting point for the investor could also be a portfolio recommendedby another, such as an investing magazine's picks for the next fewyears, or an analyst or investment bank's selections, or anorganization's preferences (such as the AFL-CIO's or the BusinessRoundTable's preferences or members), or even a famous person'sselections. In each case the investor obtains the benefits of the systemproviding a portfolio of directly owned securities, as opposed to aninterest in a fund or trust.

The present invention also provides for the collection of informationconcerning the plurality of investors of the system of the presentinvention. Investor characteristics are collected and stored on ananonymous basis so that subsequent access to information derived frominvestor statistics and demographics can not be traced to any oneparticular investor. This data collection capability leads to a varietyof novel investment strategies. For example, information might becollected from a number of patent lawyers or economists. An investor ofthe system might then be able to pose a question concerning a particularaffinity group, for example patent attorneys or economists. The investormight then be interested in what securities are being invested in bypatent lawyers or economists.

Once an affinity group is identified, the system can gather statisticsfor the investor noting, again hypothetically, that as a group, patentattorneys invest in high technology stocks. The system could then listthe ten most frequently traded high technology stocks in which patentattorneys are interested. Similarly, the system can gather statisticsfor the investor on what level of risk and return generallycharacterizes the current portfolio investing by economists, and thencreate a portfolio that matches those portfolio characteristics.

If an investor has a particular interest in a more specific affinitygroup, the investor might query the system of the present invention toprovide all of the securities in which patent attorneys who specializein mechanical engineering are investing. Again general groupings ofsecurities could be presented or the top ten securities being traded bymechanical patent attorneys can be listed, or the portfoliocharacteristics can be selected and matched.

Since a wide variety of information can be obtained by the system of thepresent invention, various multivariate analyses can be performed sothat a wide variety of affinities can be created. For example, ageneralized profile can be created for all those investors who earn morethan $75,000.00 per year. Alternatively, all those investors who have anengineering background in electrical engineering, regardless of theiractual profession, can be created. A securities listing for all actorswho live in California could also be created.

Once these affinity group investment characteristics and strategies arecreated, an investor can have the option of investing in the sameportfolio (based on risk/return characteristics, identity of securitycharacteristics, such as high tech, or individual securities orotherwise) as is listed for a particular affinity group. Thus affinitygroup investing can be supported by the system of the present invention.This again provides numerous options for unsophisticated investors, orthose investors who simply wish to take advantage of the thoughtprocesses of a particular group of investors whose characteristics areselected by the investor.

An additional functionality of the present invention is to assess therelative performance of the portfolio of each affinity group. Since thesecurities either as groups (e.g., utilities) or individual stocks(e.g., Intel) can be analyzed over various periods of time based uponinformation stored in the securities database of the present inventionsuch information can be provided to the investor. In this manner aninvestor might determine that Hollywood actors are better investors thanpatent attorneys.

An additional benefit of the present invention is that it allows for aninvestor to modify the investor's portfolio without selling all thesecurities held by the investor, but rather by simply modifying theportfolio. Consequently, as compared to an investment in funds where aninvestor may wish to switch from a Fidelity fund to a somewhat morerisky Vanguard fund, where the investor currently has to sell theFidelity fund (with possible tax consequences) to buy the Vanguard fund,under the present invention, the investor merely has to increase therisk level. According to one aspect of the present invention then, aninvestor that wishes to match the risk level (within possible limits) ofa specified fund merely modifies the risk level of the given portfolioto do so. This can be accomplished by leveraging (margining) the currentsecurities positions without having to sell any of the securities.

According to yet another aspect of the present invention, in order topermit the investor to understand and manage its portfolio on a whole,integrated basis, the investor would be permitted, for purpose ofanalyses, to aggregate the holdings in multiple accounts (such as anIRA, a 401(k), and a non-tax-advantaged account that the investor usesfor investing). In this manner, the investor can view all its holdingsin securities and other investments as a single integrated investmentportfolio for purposes of determining risk levels, diversification,concentration, sector exposure, or otherwise. Consequently, the investorobtains the benefits of viewing its portfolio as an integrated whole, asopposed to a series of unconnected investments, even though for legalpurposes the accounts are maintained as legally disparate and separateaccounts. According to yet another aspect of the present invention, thesame concepts of aggregating across legally disparate accounts could beemployed in connection with other securities, primarily interests infunds, and even investments other than individual securities or funds,such as real estate, gold or other investments, that an investor mighthold.

In addition, individuals who wish to invest in securities, or who shouldinvest in securities in order to achieve their financial goals,frequently are not sufficiently sophisticated enough to be familiar withthe wide variety of technical terms and their meanings associated withsuch investing. For example the term “volatility” may have littlemeaning to a novice investor. Further, such an investor might havespecific desires for stocks which might be expressed in terms of adesire to invest in “big companies” or “high tech” stocks yet theinvestor may not have a firm foundation for what these terms actuallymean. In order to assist novice investors in taking advantage of thewide variety of capabilities of the present invention, a naturallanguage interface is provided wherein an investor can pose investmentpreferences in terms with which the investor is comfortable. The naturallanguage interface parses the input language of the investor intosecurities characteristics that would meet the investor's needs. Forexample, if the investor desires to invest only in “big companies,” thenatural language interface translates that desire into a query againstannual revenues of companies in the securities database. Further, theterm, “big companies” could then be determined to mean companies whoseannual gross revenue is in excess of $1 billion, for example. This inturn implicates only certain stocks in the generalized portfolio ofsecurities in the system's database. Therefore, as a result of theinvestor's desire to invest in “big companies” a series of stocks wouldbe selected and displayed to the investor which fits into thecharacteristics desired by the investor.

This natural language interface can be accomplished in several fashions.For example, keyboard queries now exist in most software packageswhereby an investor can pose a question in a natural language which isthen interpreted by a natural language interface to retrieve topicsuggestions. Additionally, speech processing is now at a point wherevoice input can be used as direct input to a natural language interface.In this fashion, investors who wish to speak their requests, orindividuals who are handicapped and have difficulty using a keyboard,can use a speech processor connected to the natural language interfaceof the present invention to input their requests for stocks of aparticular type.

For those investors who generally want to invest but are totallyunfamiliar with the terminology that characterizes stocks, a series ofscreens may be presented to the investor which gives the investoroptions in a natural language form which the investor can then select asinput to the system for the selection of securities. For example, ascreen may provide the investor with choices which state “I wish toinvest in large companies.” In this example, checking of this particularcharacteristic on a screen results in a series of securitiescharacteristics being triggered in a query against the generalizeddatabase of securities. In this case a natural language processor is notnecessarily required since the “canned” queries can already have therules for securities selection associated with the choice on the screen.

Thus in this fashion investing in securities is simplified for thoseinvestors who are new to investing or who simply lack the vocabulary tospecify the securities such investors' desire.

BRIEF DESCRIPTION OF THE DRAWINGS

FIG. 1 depicts the process according to the present invention in blockdiagram format.

FIG. 2 depicts a sample investor input questionnaire for use in an assetallocation model.

FIG. 3 depicts a sample output of an asset allocation model.

FIG. 4(A) depicts a sample portfolio editor screen according to thepresent invention and FIG. 4(B) depicts a sample portfolio selectionscreen with other portfolio starting points.

FIG. 5 depicts a sample output of the portfolio selection process of thepresent invention.

FIG. 6 depicts an overall block diagram of the computer-based system ofthe present invention.

FIG. 7 depicts a flow chart of the graphical investor interfacepresented to the investor during the creation or modification of theportfolio according to the computer-based system of the presentinvention.

FIG. 8 depicts a flow chart of the graphical investor interfacepresented to the investor in connection with the investor employingother features of the system according to the computer-based system ofthe present invention.

FIGS. 9-12 depict a flow chart of the processing occurring at a Webserver in connection with creating or modifying a small sample portfolioaccording to the computer-based system of the present invention.

FIG. 13 depicts certain screens presented to an investor during varioussteps in the process of creating or modifying a portfolio according tothe computer-based system of the present invention.

FIG. 14 depicts a block diagram of an exemplary computer-based systemaccording to the present invention interacting with existing systems.

FIG. 15 depicts the natural investor interface as it relates to thecomputer-based system according to the present invention.

FIG. 16 depicts the compilation of affinity and collaborative filteringtechniques used in conjunction with and as they relate to thecomputer-based system according to the present invention.

FIG. 17 depicts a dial-back security mechanism for transmittingsensitive information to the web site.

DETAILED DESCRIPTION

As used herein, assets, rights or liabilities refers to any tradeablecommodity or item of value in which there exists a market for trading.This definition includes securities, equities, derivatives, currencies,fungible commodities, insurance contracts, mortgages, bonds, airlinereservations, hotel reservations, golf tee times, country clubmemberships, antiques, etc. Although the computer-based system of thepresent invention can be used with regard to any asset or liability thatis traded, the discussion herein relates primarily to its use inconnection with securities for simplicity purposes.

As used herein, smaller investors includes generally any investorinvesting a smaller amount, regardless of whether an investor is aninstitution or an individual, and regardless of whether the investor isacting on its own behalf or on behalf of another. It would also includean investor investing through a financial planner, for example, whoactually provides the inputs for and access to the system on behalf ofthe investor. The present invention consists of a computer-based systemthat provides smaller investors, a convenient and simple mechanism forinvesting small amounts including on a periodic basis, and a personalcomputer based or accessible program for managing a portfolio ofsecurities, including the ability to make adjustments to the portfolioby selling or purchasing securities to modify the portfolio, formonitoring tax effects, for passing through voting rights of thesecurities and for delegating such rights to third parties at thediscretion of the investor, for limiting parameters of portfolios ifdesired by the investor or another with authority over the account, andfor analyzing investments held by the investor on an integrated,portfolio basis.

By aggregating orders that are otherwise economically unviable, such asodd lots, fractional shares and small orders, into one large order, thepresent invention creates an economy of scale that permits smallerinvestors to create, own and manage a portfolio of securities, i.e., anindividual mutual fund-type of investment that is tailored to thespecific preferences of each investor. By aggregating orders into oneorder the present invention permits costs to be based on a small feerelative to each economically unviable order, rather than even a smallfee that would otherwise make placing the economically unviable orderimpractical. For example, if an individual or smaller investor can onlyafford to invest $100 per month, and wants to create diversification,each time the investor invests in 30 stocks, he would have to pay, say$5 for each order under existing deep discount brokerages (and thatwould be just the commission charge, not including the all-in-costs fromwide spreads, etc.). Obviously, no one would pay $150 to invest $100. Incontrast, the present invention permits the small investor to invest his$100 per month because the entire order being placed by the systemincurs one fee that is then distributed across the orders pro rata,hence a small order only incurs a small fee. For example, if the entirefee was 2% of the order, then the investor would owe $2 for his $100investment.

The structure of the system of the present invention also allows itscost to be based on access to or usage of the system (such as a monthlyfee of $5) as opposed to according to securities orders entered into thesystem, as per common brokerage. The result is that the investor cancost-effectively create a portfolio of securities comprised of directlyowned individual securities with attributes similar to a mutual fund,such as diversification, but with advantages, such as tax advantages,over a mutual fund.

The underlying purpose and principal theme embodied in thecomputer-based system of the present invention is that investors shouldbe able to invest in tradeable assets as a portfolio instead of as acollection of individual assets. In other words, as portfolio theoryteaches, the value of an asset to a portfolio is different from thevalue of the asset by itself; the computer-based system of the presentinvention, therefore, permits investors to make investment decisionsbased on the effect on the investor's portfolio, and to create andmaintain a diversified portfolio.

The computer-based system of the present invention as compared to funds,among other things, provides:

1. Complete control for the investor over what securities can beselected, and in what weights and amounts.

2. Control over the tax effects of purchases or sales of the securitiesincluded in the portfolio, preventing the investor from being presentedwith unwanted taxable gain due to discretionary sales transactions offund managers.

3. All the information necessary to monitor and manage tax effects andthe capability to sell or buy the individual securities in his portfolioto obtain desired tax benefits.

4. All shareholder rights with respect to each security in the portfolioto the investor and full ownership and control over all investment,voting and other decisions regarding such securities.

5. Direct control over the charges and expenses that will be incurred.

6. The possibility of making multiple and intra-day investment decisionsby the investor, if he wishes.

7. Control over all factors in the portfolio and modification of them asthe investor sees fit.

Furthermore, compared to existing brokerage services, the computer-basedsystem of the present invention:

1. (a) Reduces costs because the system aggregates order flow, limitsthe number of actual trades that need to be made external to the system,directs investors to specified securities to further concentrate theorder flow, and automates the input process. (Consequently, the system'scharges to the investors for the creation of a portfolio can be farless—on the order of one to two orders of magnitude less—as compared toeven deep discount or non-discount brokers, respectively.); and (b)Enables an investor to select individual securities reflecting hispreferences to be included within a diversified portfolio by steppingthe investor through all the issues for creating and managing adiversified portfolio and by providing the method and apparatusnecessary to create and manage such a portfolio.

2. Enables an investor to acquire fractional and small numbers ofshares, thereby permitting the cost-effective creation and maintenanceof smaller, but diversified, portfolios. As a result, the computer-basedsystem of the present invention permits even a very small investor tocreate and own a diversified portfolio of securities (or any otherassets or liabilities) for any amount, even if all of the shares arefractional amounts!

The computer-based system of the present invention permits, withoutincurring any additional costs, investors to purchase or sell small—andeven fractional—units of shares. This is because, according to oneembodiment of the computer-based system of the present invention, thesystem aggregates orders provided by its investors, executes theaggregated transactions and then allocates the acquired (or cash forsold) shares back to the accounts of the investors. (Since transactionsoutside of the system must still be made in full share amounts, it ispossible that a fractional share amount could remain after theallocations. For example, 7½ shares of a stock in total could beallocated to 15 different accounts—with ½ share allocated to each. Toeffect this transaction, if the shares are acquired from outside thesystem, the broker operating the system would acquire 8 shares. Theremaining ½ share would be owned by the broker or a third party workerwith the broker operating the system and held for allocation as neededin subsequent rounds of trading.) Consequently, an investor could have$150 per week invested in 50 stocks, receiving an allocation to hisaccount of fractional shares. Each subsequent week, the investor wouldhave added to his account additional fractional interests in each ofthese stocks. Over the course of a year with, for example, about $7,800invested, the investor would have full and fractional shares in hisaccount (if the average stock price were $30, the investor would have onaverage a little over 5 shares—5.2 shares to be precise—in each of 50stocks). The system of the present invention permits that fullinvestment each week (or any desired period) in a diversified portfolio,the transactions in small share interests, and the transactions infractional interests (none of which is possible on a cost-effectivebasis with ordinary brokerage). According to another embodiment of thecomputer-based system of the present invention, the system could bemaintained by a broker so that the orders of the investors are executedby the broker or a third party as principal, with the broker maintaininga position in the securities, and thereby, in essence, aggregating theorders of the investors as contra-side transactions of the broker.Periodically, the broker could then execute an off-setting trade in themarketplace if the broker did not wish to carry the position.

3. Enables an investor to select individual securities reflectingpreferences to be included within a diversified portfolio, and providesthe information and tools necessary to create this type of portfolio fora low cost. The tools can also include “pre-packaged” or “celebrity” orother selected portfolios that can be further modified by the investor,or portfolios reflecting the portfolios or portfolio characteristics ofspecified affinity groups or other selected investors.

4. Enables reduced transactions costs by accepting customer ordersentered at any time and aggregating them for trading. The computer-basedsystem of the present invention holds the orders (except for those forwhich immediate execution is desired by the customer) until particulartimes, such as for example, at least three times per day (the “open” forany orders received since the last close of business, “mid-day” for allorders received during the morning, and the “close” for all ordersreceived during the afternoon). The number of times orders could betraded is in general not limited, and depends to some extent on thenumber of investors, and the degree of risk or principal positioningthat the broker wishes to accept. The computer-based system of thepresent invention takes all the orders that have been entered with itand, at the specified time, aggregates those orders for the purpose ofreducing the number of transactions that would have to be executed,thereby reducing transaction costs and providing benefits to investors.

5. Enables superior trade execution of orders through netting.Furthermore, the computer-based system of the present invention includesthe capability of netting orders against each other. The remainingorders that cannot be matched are executed internally (to the extent thesystem is making a market in the securities being traded) or forwardedfor execution to a third party execution system (such as an exchange ora market maker).

6. Monitors portfolio based tax effects. In contrast to the prior art,the underlying concept of the computer-based system of the presentinvention relates to the creation of a portfolio. In that context, themonitoring of the portfolio for tax effects is an adjunct to thetransaction history and portfolio monitoring is part of the system.Consequently, the computer-based system of the present invention cantrack the basis and acquisition date in each of the securities in theportfolio and use that basis to determine the tax consequences for theindividual securities and the portfolio as a whole at any point in time.

7. Assists in the exercise of shareholder rights. Because thecomputer-based system of the present invention is designed to assistwith regard to portfolios, including the exercise of shareholder rightsregarding the portfolio securities, the computer-based system of thepresent invention offers assistance to investors in the form ofaggregating not only their order execution, but also their voting orother rights. Consequently, an investor can obtain information inconnection with his portfolio as to how securities could be voted by aservice that analyzes the securities in the portfolio. The investor ispermitted to direct that the voting be delegated to such service (orother services if multiple services are made available).

8. Permits the establishment of portfolio parameters. Because thecomputer-based system of the present invention is designed to assist inthe creation of portfolios comprised of individual securities as opposedto the acquisition of individual securities as such, the portfolios canhave limits imposed on them to facilitate “informed” or “reasonable”investing as determined by a plan sponsor or other party. Suchparameters can be such that the portfolio must be diversified and nottoo risky, for example (in other words, it must have a set minimumnumber of stocks, such as 30, satisfying certain criteria, with no onestock accounting for more than 5% of the portfolio's value, and theoverall risk in the portfolio not being in excess of a specified amount,such as 110%, of the S&P 500 risk level).

System Overview

A block diagram of the process flow according to an exemplary embodimentof the computer-based system of the present invention is depicted inFIG. 1. The system 10 includes an asset allocation model 1, a portfolioselection editor 2, a web server 3 with storage 4, a database oftradeable assets or liabilities 6, a third party trading system 5coupled to a clearinghouse 8, and a third party payment system 7.Information is provided by the investor to the computer-based system 10through a graphical investor interface, which is shown in FIG. 1 in twoparts as the asset allocation model 1 and the portfolio selection editor2.

In the asset allocation model 1; an investor is first queried foranswers to a series of questions that determine investor data (e.g.,name, address, payment information, etc.), the investor's risk toleranceand financial goals and objectives, the investor's current assets andliabilities, the investor's current and expected income and current andexpected expenditures and time frames (e.g., college education forchildren within 10-15 years, care of a parent within 5-10 years), theinvestor's preferred risk-return characteristics, the investor'spreferences for various types of securities and preferred portfolio mix,and various other items. There are a variety of different outputs forthe asset allocation model. One formulation is an amount that theinvestor should invest in long-term investments, medium-terminvestments, and short-term investments. The asset allocation modeldetermines a percentage allocation in each of the general investmenttypes according to a set of known tables. There are many existing assetallocation models, any of which can be employed in the presentinvention, such as that provided by Quicken™, Mentun Investment™ fromThe Mentum Corporation and perhaps Financial Engines(www.financialengines.com).

An exemplary questionnaire used for input to any of the above assetallocation models is depicted in FIG. 2. FIG. 3 depicts an exemplaryoutput of such an asset allocation model.

The investor can enter the system at various stages, however, and neednot answer all the questions. For example, the investor could start atthe beginning, presenting all the basic information about age, income,liabilities, financial goals, etc. In that instance, the computer-basedsystem of the present invention utilizes any of the known and publiclyavailable asset allocation models, or a combination of such models, toprovide information to the investor as to the percentage of investableassets that should be allocated, generally, to short-term liquidinvestments (such as a money market fund, or short-term government orinvestment grade bonds), medium term investments such as medium termbonds, and long-term investments (such as equities, private placementsor the like).

Once this percentage allocation is generally determined, the systemenables the investor, as described below, to select a portfolio oftradeable assets or liabilities. This selection involves providing amongother things an indication of the historical levels of risk and returnsof the tradeable assets or liabilities to the investor as a portfolio ofinvestments.

Once the investor selects his desired portfolio based on his variouspreferences as to specific assets or liabilities to be included in theportfolio, that portfolio may include different historical and expectedlevels of return than necessary to achieve the investor's statedfinancial goals. Consequently, the present invention provides anindication to the investor that these selections now require amodification of either the investor's specific asset/liabilitypreferences or the percentage allocation to reach his investmentobjectives. The system does this by comparing the historical andexpected rates of returns of the investor's portfolio to the rates ofreturn assumed in the asset allocation models using known probabilisticmethods including value at risk and sensitivity analysis, and whendetermining a difference exists, suggesting an adjustment in thepercentage allocation to correct for the difference so that the desiredfinancial goals can be achieved within the constraints set by theinvestor. To the extent these goals cannot be achieved, the presentinvention informs the investor that the risk return levels are notsufficient to reach the established goals. Moreover, the system providesfurther information to the investor as to what returns and levels ofinvestment would be necessary to satisfy various financial goalsmodified to take into account the investor's risk preferences asprovided to the system.

In addition, the asset allocation model to be used utilizesprobabilistic estimates of the likelihood of meeting those goals givenvarious asset allocations. In the case where the investor steps throughthis series of inquiries in the asset allocation model—which, as noted,is optional—the investor is presented with an output that is then usedas an input to the next stage: namely, building the specific portfolio.

One unique feature of the present invention is shown by the distinctionto the normal use of an asset allocation model, even one utilizingprobabilistic returns such as Financial Engines. Under the presentinvention, the amount to be allocated to various asset classes isinformed and is dynamically adjusted by the investor's preferences—notjust the investor's demographic and asset/liability/income/expenditureinformation. By way of example, take two investor's who are identical inevery respect regarding their assets and income and expected income fromtheir jobs, their liabilities and expected expenditures, and financialgoals for retirement, etc., except for their risk tolerance andpreferences. One investor is very risk adverse, the other very willingto take risks. The usual asset allocation models would prescribeidentical allocations to each. Adding probabilistic determinations as tothe performance of various asset classes or various assets, such asmutual funds, simply allows a finer tuning and more accurate use of theasset allocation model. In other words, it simply ensures that when thedetermination is made to invest in a fund that returns an equity levelinvestment, that the fund so invested in actually is expected to providethat return. It would still generate identical results for the generalasset allocation or specific asset allocation, because it uses theinformation as to the investor's goals—and the asset's probabilisticreturns—to arrive at a model of what asset is needed to satisfy theinvestor's goals. It does not use the investor's own risk tolerance in adynamic manner to adjust the asset allocation model. But if, forexample, some significant allocation in equities is necessary to reachthe specified financial goals, and the investor who is very risk adverseis unwilling or reluctant to invest in equities that have ordinarymarket risk, it will be important to adjust the allocation and theactual equity portfolio in which the investments will be made. In otherwords, while the non-risk adverse investor may have, as an example,one-sixth of his investable assets in money market or short-terminstruments, one-third in high risk equities, and one-half inintermediate risk instruments, it may be necessary for the risk-adverseinvestor to, contrary to expectations, have a portfolio that has moreequities—but ones with lower risk—to satisfy both his financial goalsand his perception of risk. Thus, the system of the present inventionprovides the asset allocation model with additional risk preferenceinformation that can be acted upon precisely through specific securityportfolio allocation, as opposed to the typical asset allocation modelthat simply provides for an allocation to “equities” or to “funds” andthen finds the equities or funds that satisfy the average as determinedby the model, without being able to distinguish between—or create andact on—specific portfolios of equities that will be optimal for theinvestor taking into account, on a dynamic basis, the actual riskpreferences, as opposed to only the financial goals and related factors,of the investor.

Notwithstanding this potential benefit, an investor could completelyskip that portion of the interface involved in the asset allocationdetermination, and move directly to creating a portfolio, such as bystating that the investor wishes to invest in equities and would like tocreate a portfolio based on stated preferences. In this case, theinvestor enters those preferences just as an investor starting with theasset allocation determination would have entered these preferences, butwithout seeking the allocation, or the investor can select from a numberof other portfolio creating starting points, such as pre-packagedportfolios, celebrity portfolios, affinity group portfolios, orportfolios suggested or recommended by the system based on theinvestor's risk and return preferences as generally stated by theinvestor. The portfolio screens enable selection of securities based ontype of business or industry, stock volatility, capitalization,inclusion in various indices, book-to-earnings ratio or other financialmeasures, corporate governance or other matters, etc. The otherportfolio creation starting points would consist of portfolios such asvarious indices (or subsets of various indices that generally reflectthe risk—return characteristics of the indices), various strategies,such as the ten stocks in the Dow Jones Industrial Index thatunderperformed during the last calendar year, or other strategiesembodied in various unit investment trusts, celebrity portfoliosreflecting the portfolios of famous people or analysts or others, orportfolios encompassing recommendations from investing magazines ornewsletters or other sources, or portfolios reflecting screenedrisk—return characteristics from various affinity groups that can becreated by the investor, such as the portfolio characteristics ofmanagers with more than $200,000 income, securities lawyers living inWashington, D.C., engineers in Silicon Valley, commercial bank officersor other groups (all aggregated and with permission to protect privacy).An exemplary screen for inputting criteria for selecting the securitiesin the portfolio is depicted in FIGS. 4(A) and 4(B).

FIG. 5 depicts an exemplary output of the selection, in which each ofthe forty securities are equally weighted in the portfolio in terms ofdollars invested in each security, which such exemplary portfolio couldhave been obtained through the investor's screening of stocks as part ofthe screening selection criteria based on book value, etc. pre-packagedportfolios, etc. affinity portfolios, etc. all as modified by theinvestor. Other variations are possible, and they can depend upon theprice of the underlying security, and the total numbers of securitiesavailable, and the combined risk factor desired for the entireportfolio.

To accomplish this selection, the portfolio editor 2 accesses the webserver 3, which in turn accesses the database 6 of equities, bonds, etc.This database is constantly updated with pricing, capitalization, priceto earnings ratio, etc. from various stock reporting services known inthe art. Each relevant factor of a security is associated with thatsecurity. When the investor establishes criteria for his portfolio, eachof the relevant factors for each security in the database is compared tothe criteria, and if they match the security is either included orexcluded from the portfolio depending on the particular criterion.

As an example, an investor might have stated that he wished to investsolely in large capitalization, software, financial services andentertainment companies based in the United States with no negativecorporate governance factors. The system then returns a listing ofstocks, including obvious ones that are household names and some thatare not. The system then specifies percentages of each stock to allocateto the portfolio in order to insure a reasonable level ofdiversification (and would alert the investor if that could not bedone). One example would be dividing the total dollar amount beinginvested by the number of securities meeting the criteria entered by theinvestor and allocating an equal dollar amount or acapitalization-weighted dollar amount to each of the securities, and ifthere were fewer than twenty securities for example, indicating to theinvestor that reasonable levels of diversification were not necessarilyachieved. It should be noted that other levels of diversification couldbe used as well.

In addition, the system specifies the level of risk for the portfolioand suggests changes to satisfy the investor's preferences. As anexample, if there were insufficient companies in the above list, thesystem would suggest either relaxing the capitalization standard, orincluding more industries, such as communications, which could be viewedas similar to the non-manufacturing industries selected by the investor.

In conjunction with certain of these screens, the investor is providedwith a response that shows the investor, graphically and/or with textand/or number representations, the results of the investor's selections.An exemplary portfolio is depicted in FIG. 5. The results include acomparison of the historical inherent risk in the selected portfoliorelative to known standards, such as the S&P 500, and the riskiness fromthe perspective of lost principal, etc. of the portfolio for specifiedperiods or through specified formulas.

The investor next specifies the dollar amount to be invested in thisportfolio. The investor's order is then aggregated with the orders ofother investors (or the broker becomes the aggregator by executing theorder and taking a position in the stocks). To purchase the definedportfolio, the investor must have assets on hand or credit to acquirethe securities, which can be obtained through any of various mechanisms,such as a direct deposit to the system, through a check or electronicfunds transfer (EFT) to the broker operating the system, by arrangingcredit to be extended (including on a temporary basis while the order isbeing settled), or by having cash or other securities to be sold on handfrom previous transactions, etc. Those systems that involve thirdparties are depicted in the figures as the third party payment system 7.One of the options offered by the system is a money market fund forexcess cash, as well as a linked debit card, credit card, check writingfacility to reach funds in the investor's account and other ordinary andknown cash management services.

The system electronically executes the needed transaction at the nexttransaction window (which could be set at the discretion of the systemoperator (the broker or bank running the system), such as when a certainmarket exposure such as when $10,000 or more of a long position in asecurity or aggregation of securities in portfolios is reached, or atset times such as three times a day) to create the specified portfoliofor the investor. This transaction is performed in two steps. First, theorders of all investors are aggregated within the system 10 (with thesystem operator potentially pre-aggregating some orders as principal,such as by executing against itself all orders of less than $1000 andthen aggregating these orders as one larger order that it executes foritself) and then netted against each other, again within the system 10,to the extent consistent with then applicable regulations. Then, if thesystem is not part of a broker making a market in the securities, theexcess trades are electronically sent to a third party trading system,such as the OptiMark™ trading system. If the system is part of such abroker making a market in the securities, then the broker executes theexcess trades directly. This portfolio creation and execution, withaggregation in connection with the transactions (in transaction windowswith or without the broker engaging in some pre-aggregation) and with orwithout netting, of customized orders of individual securities forsmaller investors—the ability actually to effect the transaction andcreate and manage the portfolio of securities—allows investors to obtainadvantages over ordinary brokerage and over selecting and investing inmutual funds, and over those systems that purport to monitor portfolios,either of securities or of funds.

The computer-based system of the present invention includes thecapability to allocate suggested holdings to the investor to create adiversified portfolio (which likely will include fractional shareinterests in stocks). The portfolio created by the computer-based systemof the present invention provides the investor the benefits of modemportfolio management theory and does so in the context of a system thatallows for the creation and maintenance of the portfolio for a cost thatis reasonable in light of the portfolio's size.

Additional funds can be added to purchase additional stocks, or amountsof existing stocks, in the portfolio, with such funds being addedautomatically out of direct deposits of paychecks, for example, or salesof part or all of the portfolio can be effected, numerous times a day.If the investor wishes to add or sell specified stocks, for example fortax purposes where the investor wishes to obtain a taxable loss, thesystem informs the investor of the effects of the change on theportfolio's diversification and risk levels, etc. But (unless there issome restriction imposed by an employer for example) the investor hascomplete control and can determine to create a completelynon-diversified portfolio comprising only one or a few stocks, ifdesired, by selecting to have the system acquire, or the portfolioconsist exclusively after sales of, only those stocks. Additionally, anyof the preferences specified by the investor can be adjusted and madeeffective numerous times a day. If the investor changes his preferences,the system will review the investor's current holdings and suggestchanges to reflect the new preferences, including any changes in, or tomaintain, desired risk/return levels. Similarly, as the actualexperience of the securities in the portfolio changes (and obviously inthe case of a company, for example, that is acquired and its securitiesare replaced with cash), the system may suggest changes even if theinvestor's preferences have not changed.

The system can be accessed by the investor from a main frame or serverat a distant location with the investor utilizing a direct dial-upconnection or Internet access, through an intermediary such as a bank orbroker, or the invention can be embodied in part on the investor'scomputer with the investor linking to the distant site through any ofthese access means to obtain specific information and provideinformation needed to execute trades. In other words, much of theprocessing can be completed “off-line” with the connection to the serverbeing required only to obtain updated data or to send an order for aportfolio modification, or completely “on-line” depending on how much ofthe present invention is made resident on the investor's computer.

Overall System

FIG. 6 depicts an exemplary block diagram of the computer-based systemof the present invention. It depicts an investor's computer 11 aconnected to a communication network 12, such as the Internet, which isthen connected to a web server 14 that stores the main program forcontrolling trading and investor access. In this diagram, there are twoother investors' computers 11 b, 11 c also connected to the web server14 through the Internet 12. In addition, there is shown an investor'scomputer 11 d connected to the web server 14 directly through a dial-upconnection. Finally, there is shown an investor's computer 11 econnected to the web server 14 through an intermediary 13, such as abank or brokerage or financial planner, that is providing the system asa service for their customers, which is then connected either directlyor through the Internet 12 to such web server 14.

The web server 14 is also electronically connected to other investorsand traders 15 for executing trades to be made outside of thecomputer-based system of the present invention through any of a varietyof known standard interfaces, e.g., the Financial Information eXchange(FIX) protocol. Some or almost all of the program that performs themethod of the present invention can be left resident on the investor'scomputer 11 a-11 e, with the investor accessing the Server 14 to obtainupdated information and to provide orders for execution.

Graphical User Interface Program Flow

FIG. 7 depicts one possible flow chart of the graphical user interfacepresented to the investor during the creation or modification of theinvestor's portfolio.

Screen 1 (22) elicits investor identification information to permitlog-on (e.g., investor name, password and certain other information forsecurity purposes). Investors will be permitted a number of securemechanisms to provide credit card and other information to the system.Under one embodiment, however, (FIG. 17) an investor 171 accessing thesystem 173 over the Internet 172 for the first time will be provided apassword and log-on identification without having to provide anyconfidential information, such as credit card information, to theprocessing site. The site will then call the investor back 174 at anumber supplied by the investor, or the investor can access the sitethrough a direct telephone call. The investor can then supply theprocessing site with the necessary information by touch-tone input ofthe site assigned password and the investor's confidential credit cardinformation 175. Once the site has the credit card information throughdirect telephone connection, it need not be provided to the site againand the investor then uses the investor-site-specific password andlog-on identification for communications. Those passwords and log-onswill be useless for any purpose other than communication with the site,and the credit card information never travels on the Internet.

Once the investor enters the appropriate information, the program flowmoves to screen 2 (23).

Screen 2 (23) provides instructions for new investors for their firsttime through the system. For existing investors the screens are somewhatdifferent, but the general flow is the same. The information providedincludes a series of educational facts, links to other sites (such asfor academic journals or books on investing or studies posted to thesite or other services including e-mail, etc.). Investors can bypassthis screen by selecting a switch to prevent the program from stoppingon this screen during future executions of the program. In any case,program flow then proceeds to screen 3 (24).

Screen 3 (24) provides a listing of options for the investor (e.g.,create a new account, provide preferences, modify existing portfoliopreferences, purchase or sell a specific security, provide wire transferor other instructions, engage in tax review or planning, monitor pricechanges in the portfolio, establish weekly dollar contributions to theportfolio for “dollar averaging” or other purposes). The investor isalso provided the option to navigate through the site and skip oversubsequent screens if the investor wishes (as would be expected ofexperienced investors seeking to modify or simply review an existingportfolio). Program flow then proceeds to screen 4 (25).

Screen 4 (25) elicits from the investor information (see FIG. 2) tocreate an asset allocation model for the investor (again, only if theinvestor wishes, some investors may skip this). Generally, an assetallocation model helps an investor determine present investmentallocations based on current assets and liabilities, current income,future needs and other factors such as age. In general, the modeldetermines how much should be invested in equities, bonds and cash toreach the goals of the investor in the time remaining. There are manypublicly available asset allocation models. For example, Quicken™includes one as part of certain financial planning software. The WallStreet Journal has provided one as part of certain subscription offers.Either of these or others can be used to create the asset allocationmodel based on the investor input.

If the investor already has entered this information (e.g., the investoralready as an account in the system), the existing information is thendisplayed. This screen also elicits information that is used to obtainbasic information involving the investor's use of the system, such assuitability for certain types of investments and to ensure compliancewith various legal requirements, including determining whether theinvestor qualifies as an “accredited investor” or a “qualified investor”under various federal and state laws. To be an accredited investor or aqualified investor an investor must satisfy certain criteria. Once theinvestor has entered this information, the system then verifies thisinformation in the normal manner.

Screen 4 (25) also elicits information from the investor that isemployed in creating a risk-return preference function for the investor.Such information includes volatility levels, risk, required rate ofreturns (based on the above asset allocation model), etc. Theutilization of various parameters to establish that function is thenemployed to set initial defaults, which can be modified if desired bythe investor in Screen 5 (26). Program flow then proceeds to screen 5(26).

Screen 5 (26) provides for the new investor, or for an existing investorwho wishes to modify a portfolio to change preferences, a screen thatprovides a menu of preferences to set (see FIG. 4 for an example). Themenu includes listings for preferences that relate to, among otherthings (and to be modified over time as investor choice dictates): typeof security by market capitalization, book-to-market, price-earningsratio, price of stock, geographic sector, product sector, dividendpayout, historic price to current price, earnings growth and similareconomic factors, and non economic factors such as specific businesslines (for example, tobacco, managed health care or defense that may beviewed as of interest or controversial), engaging in business inparticular countries (such as Burma or China or Northern Ireland andratings from third party sources as to how the selected companies haveperformed in those countries), executive compensation and othercorporate governance factors that are rated by third parties, etc.Depending on which factors the investor selects in this screen as beingof interest, the investor is then presented with other choices through,for example, drop down menus or supplemental screens that review thespecifics of the selections and solicit additional choices. For example,if the investor selects market capitalization as a factor in theselection of stocks for the portfolio, a drop down menu allows theinvestor to select a variety of capitalizations (e.g., eight rangescould be presented, such as a market value of less than $25 million, $25to 100 million, $100 to 500 million, $500 million to $1 billion, $1 to2.5 billion, $2.5 to 5 billion, $5 billion to 10 billion, or over $10billion) which could be selected by pointing a mouse and clicking. Ifthe investor wished to obtain more information, such as a sample ofcompanies within each range, then the investor would select “moreinformation” or a similar box. The investor is then presented with ascreen that provides the additional detail that was requested.

When finished with that drop down box or screen, the investor thenreturns to the initial or other screens that are part of Screen 5 (26)and repeats the procedure setting the parameters for any other factorsfor which the investor has preferences.

Referring to FIG. 4B, alternatively, or additionally, the computer-basedsystem of the present invention also allows the investor to be presentedwith suggested portfolios created through other means—such as arecommended portfolio that reflects a specified strategy, such as theten under performing stocks from the Dow Jones Industrial Index, or froma selected analyst, or from a magazine or other publication, or from aselected organization or through collaborative techniques. As shown inFIG. 4B, the investor can select from a category of portfolios 71-76,under each of which the investor can then select a particular type ofportfolio within that category. For example, the investor can select anaverage portfolio for people with the same number of children as theinvestor by selecting “Similar Demographics” 74 and then “Number ofChildren” 77.

As further examples, a noted analyst may state that her ideal portfoliowould be the following fifty stocks in the following proportions, or amagazine may give its picks for the “ideal” portfolio, or acharitable-organization may provide a list of the corporations that havedone the most for the charity, and individual donors to the charity maywish to build a portfolio of corporate contributors, or a union may wishto provide a list of companies it works with who it believes are goodcompanies and may recommend that members acquire shares in thosecompanies. In any of these types of cases, Screen 5 would make availablethe list of companies and the suggested allocations (or if no allocationis provided by the entity creating the list, then in accordance withappropriate diversification requirements, risk and other preferences ofthe investor, as provided previously). Furthermore, the computer-basedsystem of the present invention automatically employs knowncollaborative filtering techniques, such as those utilized through aFirefly Network system (www.firefly.net) because the system already hasthe investor's preferences entered into the system. In this instance,the investor's preferences entered into the system are used to identifysecurities that may be of interest to the investor that have beenspecifically identified and transacted by others with similarpreferences. Entire portfolios can be presented. For example, if aninvestor who enters preferences regarding certain types of stocks thenseparately determines to buy another specified stock, then if anotherinvestor enters similar preferences as the first investor, that secondinvestor could be notified that an investor with similar preferencesalso specifically added for purchase this other security and the secondinvestor may wish to consider adding it as well. In this manner, thesystem of the present invention can be used to facilitate the creationof diversified portfolios created by the equivalent of investment clubs.

In any of these pre-packaged, analyst, group or collaborativerecommendations, the investor is able to select the entire portfolio asdefined, and specify the dollar amount to be invested as per Screen 8(29) (or if the investor has more securities to include then theinvestor would continue through with the program flow, or the investorcould subtract specified securities from the suggested portfolio, suchas by removing any tobacco stocks from the portfolio, or by changing theweighting of the securities in the portfolio as described in the programflow Screen 7 (28) below). Consequently, one of the investor'spreferences and a screen available to the investor is a selection ofsuggested portfolios that represent prepackaged portfolio strategies, orare recommended by particular analysts, groups or others. Program flowthen proceeds to screen 6 (27).

In each case, and in each of these screens, the investor is presentedwith a default set of preferences that the system recommends based onthe investor's stated general goals and the investor information enteredin earlier screens. For example, if an investor specified that he wishedvery little risk in his portfolio, and high dividend payout, but thenselected capitalization exclusively under $25 million, the system alertsthe investor to the fact that there are insufficient companies thatsatisfy these preferences to create a reasonably diversified portfolio.The system then recommends that the investor permit the system to selectfrom any size capitalization or suggest the investor change some of theother parameters that are constraining the choices, such as the dividendpayout.

For those factors or parameters for which the investor wishes not tomake a selection, the system uses defaults to create a portfolio thatsatisfies the other criteria, if any, that are selected by the investor.If no factors or parameters are selected at all, then the system createsa default portfolio based on the asset allocation, risk-returnpreference and other information, such as age and income, that theinvestor has provided the system. The number of different portfoliosthat the system can create is extremely large (almost limitless and inany event far in excess of the number of potential investors), and thereis no expectation that any two investors would have identical portfolios(although they could if they so requested (such as members of a familythat wish to have separate accounts but identical portfolios, or anindividual that wishes to have multiple accounts (such as an IRA and anon-IRA account) with identical portfolios), or if two persons happenedto make identical selections on all parameters, or used defaults in allcases with identical age and income ranges, etc.). Essentially, thesystem engages in an interactive process with the investor via the mainserver and the investor program executing on the investor's computer.The investor's program prompts the investor for the information neededby the main server to determine the portfolio or to create the assetallocation model. However, some of these selections made by the investorcan affect the asset allocation model, such as limiting the volatility,which can cause the program to indicate that the investor must increasethe allocation of resources to equities to achieve the desiredinvestment goals. Consequently, the process can be viewed as either atwo stage process, the first stage of which determines the assetallocation model, and the second stage of which enables the investor toselect the desired securities in his portfolio, or as a singleinteractive process during which the investor selects both the generalcategories of investment vehicles and states his investment goals, whichare often interrelated. If there are limits imposed (by a plan sponsoror employer perhaps, or by the investor itself for its own account orfor another account over which the investor has authority (which couldalso be a corporate account or some other account where parameters areset by one entity and the actual trading or execution selection is madeby another)), the limits would be made apparent in these screens and theinvestor directed to make choices that comply with the limits.

Screen 6 (27) then presents the investor with his choices and selectionsand seeks confirmation of the choices. If the investor wishes to modifyany of the choices, the investor is then returned to the appropriateprior screen (such as Screen 4 (25) or screen 5 (26) depending on theparameter to be modified). If the investor confirms the choices, hemoves to Screen 7 (28) which displays the portfolio. Program flow thenproceeds to screen 7 (28).

Screen 7 (28) provides the investor with the selected portfolio (seeFIG. 5 for an example). The portfolio can be presented in a number ofdifferent formats for the investor. Those formats include: a list of theactual stocks to be included, the relative percentages (see caveatbelow) each such stock comprises (by expected dollar allocation) in theportfolio and the risk, relative to the average, of each such stock (seebelow); by type of security selected (such as the percentage that are inone range of market capitalization as opposed to another) and variousother factors that reflect generally the factors that can be selected bythe investor; and, by risk and performance of the portfolio as a whole.

Both risk and performance are based on the historical activity of thestocks and are presented graphically, with portfolios that are riskierthan specified averages shown as such by volatility charts, and by wordssuch as “this portfolio, on a historical basis, would lose or gain 10%of its value relative to the [specified] index 5 out of 100 tradingdays.” The portfolio could also be displayed as expected values indollar amounts based on historical returns and volatilities, withprobabilities and sensitivity analyses being performed. The output couldbe a graph showing the expected distribution of the values (much like abell shaped curve showing the average expected value and the tailsshowing the high and low expected values at specified levels oflikelihood (or some particular numbers such as “this portfolio would beexpected to double in value over ten years but there is also a fivepercent chance that it will be worth only 60% or less of its currentvalue in ten years.”When the portfolio is displayed as a list ofsecurities to be included in the portfolio, the risk for each suchsecurity would be shown graphically, such as by a color or a bar next tothe stock. As an example, the bar would be shaded one color (such asyellow) for stocks riskier than the average and another color (such asblue) for those less risky than the average (see FIG. 13 for anexample), or the bars would extend to the right of each listed stock forthose stocks that are less risky and to the left for those that are morerisky. The longer the bar, the further it departs from the average. Aninvestor wishing then to increase the level of riskiness in theportfolio can either return to the screen where risk levels are set withthe result that the portfolio will be readjusted to be riskier, orselect those stocks that contribute to higher levels of risk andincrease the allocation to such stock, or add to the level of risk byspecifying that margin should be used (in other words, that the investorwill request a loan from the intermediary running the system or anothersource to acquire securities on a leveraged basis), thereby increasingthe risk level of the portfolio. In addition, if the investor wished tomake the portfolio similar in risk levels to some other portfolio, suchas a fund that the investor was accustomed to investing in, or wished tomake the portfolio more or less risky than that fund or some otherportfolio, the investor would be given the opportunity to specify theprecise risk level desired by inputting the desired risk level into thesystem, either by changing the position of the pointer on a dial, oranother device described herein for specifying the overall risk level ofthe portfolio.

More generally, at this point, the investor can manually adjust theportfolio in whatever manner he sees fit by increasing or decreasing theselection of a particular stock, or by adding a stock that is nototherwise included in the portfolio and specifying the percentage to beallocated to that stock.

The investor is also provided the opportunity to specify whether some orall stocks should not be purchased if the price moves materially beyondthe current price at the time of execution (if the system operator isnot executing the order immediately and assuming the price movement riskas a pre-aggregator). Program flow then proceeds to screen 8 (29).

Screen 8 (29) provides the investor with final confirmation of theportfolio, and solicits from the investor the amount to be invested inthis portfolio. The investor enters that information as a dollar amount.Because the precise prices at which the specific stocks are to bepurchased will not be known until the time of purchase (if the systemoperator is not executing the order immediately and assuming the pricemovement risk as a pre-aggregator), the number of shares of anyparticular stock to be allocated to a particular portfolio needs to besomewhat approximate to accommodate price swings prior to the executionof the trade. With that caveat, the portfolio allocations and thespecific securities to be purchased are then stored either in thestorage facility on the investor's computer and when transferred to themain server stored there as well, or stored just in one location. Theprecise number of shares to be purchased and allocated to this investorare determined at the next transaction window based on the then currentprices for the stocks-as they are purchased for the account of thatinvestor. The portfolio is then updated and stored by the system foraccess the next time the investor logs onto the system.

FIG. 8 depicts one possible flow chart of the graphical investorinterface presented to the investor in connection with the investoremploying other features of the system.

Screens 1, 2 and 3 (32 a, 32 b, 32 c) are the same as in FIG. 7, exceptthat a menu is presented as soon as the investor logs on that permitshim to skip directly to alternate screens without having to sequencethrough Screens 2 (32 b) and 3 (32 c).

In other words, the choices in Screen 3 (32 c) are presented as a“toolbar” upon logon that the investor can directly access in order tomove to any of the other screens in the system. After screens 2 (32 a-32c), program flow then proceeds to screen 4 (33).

Screen 4 (33)—the first screen an investor sees after the log-on,assuming the investor selected alternatives from the “Screen3-equivalent-toolbar” other than “create or modify a portfolio”—providesa menu of alternative services. Those services are varied, and depend tosome degree on the investor. For example, offerings of securitiespursuant to private placements can be made legally only to “accreditedinvestors.” Consequently, the system identifies those investors who areaccredited investors and provides to them a menu item for reviewingprivate placement opportunities. Conversely, the system does not providesuch a menu item to non-accredited investors who, under current law,cannot receive such offerings. Program flow then proceeds to screen 5(34).

Screen 5 (34) is the operational screen for the services selected by theinvestor. If, for example, the investor wishes to evaluate the portfoliofor tax effects, this Screen 5 (34) permits him to do so. The investorwould specify in the tax effects communications menu the relevantparameters selecting from those available—such as stocks with losses,stocks with gains, long-term versus short-term gain or loss,combinations of the parameters, or all current tax positions. The systemwould then display for the investor the stock positions that satisfy theinvestor's parameters, with dollar amounts listed. Because of the waythe system works—allowing for frequent additions of dollar amounts tothe portfolio for strategies such as dollar cost averaging, and forfrequent adjustments to the portfolio securities themselves, it ispossible that an investor would have gains and losses in the same stock(for example, if the investor had bought 10 shares of a stock at $20 andten shares of the same stock at $30 and the stock is now trading at $25,the investor would have gains and losses in the stock when eachtransaction is viewed separately). In that instance, the system woulddisplay the stock as having both such gains and losses. The investorwould then be presented with a series of options as to what he wouldlike to do next. These options are smart options and context sensitiveso that, for example, an investor is able to sell individual securitiessimply by highlighting those securities in the list and clicking acommand something like “sell at next portfolio adjustment.” Thetransaction is then added to the portfolio as an adjustment and executedat the next transaction window. If the investor wished to sellimmediately, the investor would highlight the securities and click “sellimmediately” (for which it is contemplated that an extra charge would belevied). In either case a confirmation window either pops-up confirmingthe investor's choice at that time, or the confirmation is deferred tothe end (at the investor's option) when the investor confirms allrequested actions.

The computer-based system of the present invention also provides taxpreparation as it relates to transactions occurring through theinvention. Specifically, as is necessary to provide the gain and lossinformation as described above, the computer-based system of the presentinvention tracks the tax basis information (including acquisition date)of securities purchased through the system and the sales price for suchsecurities as well as any costs involved in maintaining the portfolio.

Consequently, the system executing the computer-based system of thepresent invention provides investors with a complete downloadable Form1040 Schedule D as it relates to transactions in the system. ThatSchedule could then be supplemented with any other capital transactionsthe investor may have. Similarly, the system could provide for one-stepexporting of this Schedule D type information to popular tax preparationpackages, such as Turbo Tax™, for example. This downloading andexporting enables an investor to use the system with a low level ofinconvenience.

If the investor had selected in Screen 4 (33) another service, such asreviewing private placements if the investor is an accredited investor,or reviewing public offerings, or buying or selling specific securitiesoutside of the portfolio, or buying or selling other items that would beoffered including, for example, other financial services such asinsurance or commodities or futures if permitted by applicable law, ornon-financial services such as books or software relating toinvestments, or if the investor wished to engage in chat room activitiesor discuss selected companies for which the system would hostconversations with the executives of such companies, etc., the investorwould enter any of those other services through this Screen 5 (34).

If the investor permits, the system can also rely on the informationprovided by the investor to present the investor with otherpossibilities of interest, along the lines described above, in a moreproactive manner. For example, if the investor is an accredited investorand specifies an interest in private placements involving Internet-basedpublishing companies, the system will specifically alert the investor,when she next logs-on, to the existence of such an offering, and providea means for the investor to obtain the necessary information toparticipate.

The investor is in a position to move between the operational screens,and engage in a variety of activities as mentioned. Program flow thenproceeds to screen 6 (35).

Screen 6 (35) lists the actions the investor determined to take inScreen 5 (34), to the extent the actions require a transaction of somesort, and then seeks confirmation of those actions. If the investorwishes to modify any actions he is returned to Screen 5 (34) foradjustments. After confirmation, any transactions are effected. Thesystem processes and stores the information if it relates to atransaction or requires portfolio adjustments, etc.

Web Server Program

FIGS. 9 and 10—together with FIGS. 11 and 12—depict a flow chart of theprocessing occurring at the Web server. In general the Web serverprovides communications between all investors and other systems externalto the computer-based system of the present invention, such as the thirdparty payment system, and the third party trading system.

FIGS. 9 and 10 show one of the strong advantages of the computer-basedsystem of the present invention: namely that the number of trades thatmust be executed externally to the system to implement portfolioadjustments is reduced dramatically. As indicated in FIG. 11, Investor Awishes to buy 100 shares of security A, Investor B wishes to sell 50shares of security A, and Investor C wishes to buy 150 shares ofsecurity A, giving a total of 250 shares of security A to be purchasedand 50 shares of security A to be sold through the system of the presentinvention. The net result is that 200 shares of security A need to bepurchased by the system of the present invention, which can beimplemented with a single transaction.

Also shown in FIG. 12, Investor A wishes to buy 200 shares of securityB, Investor B wishes to sell 50 shares of security B, and Investor Cwishes to sell 150 shares of security B, giving a total of 200 shares ofsecurity B to be purchased and 200 shares of security B to be soldthrough the system of the present invention. The net result is that 0shares of security B need to be purchased or sold by the system of thepresent invention.

As further indicated in FIG. 11, Investor A wishes to buy 100 shares ofsecurity C, Investor B wishes to sell 100 shares of security C, andInvestor C wishes to sell 50 shares of security C, giving a total of 100shares of security C to be purchased and 150 shares of security C to besold through the system of the present invention. The net result is that50 shares of security C need to be sold by the system of the presentinvention, again only one trade needs to be executed externally to thesystem.

In this example, the number of trades needed to execute portfoliocreations or adjustments is reduced from 9 to 2 with netting and from 9to 6 without netting. As a further example, assume the invention wasemployed on a system that was being used by 10,000 investors creatingand maintaining their portfolios from a list of 750 stocks. Assumefurther, that each investor is engaging in just five transactionsrelating to his portfolio during a given period. The number oftransactions that would normally have to be sent to an exchange or thirdparty market maker or be executed by the broker as dealer would be50,000. By contrast, employing the invention, the maximum number oftrades the system would theoretically have to execute would be 1500 (twotrades—a buy and a sell—in each stock) assuming no netting of buysagainst sells, and 750 (one trade in each stock) if there is netting ofbuys against sells, i.e., either a single buy or a single sell dependingon whether the total number of shares being bought exceeded the totalnumber of shares being sold or vice versa. In the first case, thecomputer-based system of the present invention saves the costsassociated with 48,500 trades, and in the second case, thecomputer-based system of the present invention saves the costsassociated with 49,250 trades—a ratio of over 30:1 in savings!

The computer-based system of the present invention, therefore, isadvantageous with or without netting. As a further illustration,increasing the number of investors in the above example to 100,000 wouldincrease the number of trades under ordinary brokerage tohalf-a-million. Employing the computer-based system of the presentinvention, the theoretical maximum number of trades remains at 1500 (or750 with netting). According to the computer-based system of the presentinvention, therefore, increasing the number of investors, or the numberof transactions they wish to engage in, simply increases the likelihoodthat the actual number of trades the system needs to execute will morefrequently approach the applicable theoretical maximum. Costs thereforecan be maintained at a low level in part because so few actual tradesneed to be executed, even assuming every trade is sent to a third partyfor execution.

Graphical User Interface During Creation/Modification of InvestorPortfolio

FIG. 13 depicts certain screens that may be presented to the investorduring various steps in the process of creating or modifying aportfolio.

Screen A shows one form of a general presentation of the risk 55 a andexpected differential in return 56 a of a chosen portfolio 57 a of sixstocks. The benefits of diversification can be obtained by using anumber of securities in the portfolio, with the number usually being inexcess of twenty. In actual operation then, the number of securities inthe portfolio would generally be at least twenty or more since, asnoted, part of the purpose of the invention is to allow the benefits ofdiversification to be provided to the investor. Consequently, unless theinvestor determines otherwise, the number of securities in a portfoliowill usually be at least twenty and generally would be materiallyhigher.

As the investor increases or decreases the relative percentage of thestocks (six shown in this example) in the portfolio there will be acorresponding adjustment in the risk 55 a and return 56 a for theportfolio with the pointers 51 a, 52 a either moving up or down. In thisexample, the strips 53 a, 54 a along which the pointers 51 a, 52 a,respectively, move would be color-coded (much like a litmus testingstrip). The color-coding will be used in connection with thepresentation of the individual stocks in the portfolio as shown inScreen B. The pointers 51 a, 52 a could be a dial, or any other devicefor showing one value relative to another, and could be used with orwithout the color-coding.

Screen B shows a detail of Screen A with the stocks specified and theirrelative contributions to the portfolio and their respective risks 55 band differential returns 56 b. An investor will instantly be able todetermine which stocks are contributing higher levels of risks andpresumably higher levels of returns to the portfolio and, if desired,adjust them to modify the risk/return levels in the portfolio (but seebelow). Obviously, a number of combinations will not be available aslimited by the specific stocks selected. In that instance, the systemgenerates a statement that the combination requested is not possible andsuggests alternatives such as other securities (e.g., money market fundsor preferred stocks or AAA-rated short-term notes, which in a realportfolio would be added to the mix in Screen A or B) that could loweroverall risk and returns or leveraging (which would be shown as a barincreasing the risk of the portfolio) that could increase it, ordifferent stocks with different characteristics, depending on whatpreferences the investor had earlier inputted into the system.

Alternatively, and importantly, the investor could adjust the pointers51 a, 52 a in Screen A up or down (or the hand of a dial, or the colorcode on a litmus-type strip, etc.) and the system will recalculate therequired mix of the portfolio's stocks. The investor may be required toadjust the overall mix of the securities in the portfolio in order tocomply with limits established by a plan sponsor or employer, or theinvestor itself or by the investor on behalf of another over which theinvestor has authority (which could also be a corporate account or someother account where parameters are set by one entity and the actualtrading or execution selection is made by another). This importantdynamic interface is a major advantage of the system in that it allowsinvestors to adjust their portfolios to desired risk—returncharacteristics by directly adjusting the risk and return pointers ordial or colors and having the system automatically determine what changein weighting of the securities comprising the portfolio is necessary toaccommodate those desired characteristics. Thus, investors are affordeda simple click-of-a-mouse mechanism to adjust their entire portfolio toprecisely the types of portfolio characteristics desired without havingto know about the various interactions of securities with each other orthe portfolio effects of changing one security or another or have anyother knowledge!And as noted above, if the investor wished to make theportfolio similar, or greater or lesser, in risk levels to some otherportfolio, the investor could specify the precise risk level desired byinputting the desired risk level into the system, through any of thesemeans.

Screen B also shows the calculation of the risk (beta) 55 b-55 h andexpected differential return levels 56 b-56 h for the stocks that areused to calculate the portfolio risk levels 53 a and the expecteddifferential returns 54 a of the portfolio. It would also be made clearthat a principal benefit of the computer-based system of the presentinvention and the concept of using a portfolio for investing instead ofindividual stocks is the notion that the riskiness in any one stock heldin a portfolio may be different from the riskiness of that stock held byitself (thereby generating some of the benefits that stem fromdiversification, etc.). Consequently, investors will be cautioned tofocus on portfolio risk/returns, not individual stock risk/return.Again, then, there is a great advantage to investors as described abovefrom being able to adjust their whole portfolio characteristics justthrough moving a pointer (51 a, 52 a in Screen A up or down (or the handof a dial, or the color code on a litmus-type strip, etc.)), as opposedto having to consider and understand the effects on the portfolio frommodifying individual stock positions. Thus less than expert investors,for example, can have their portfolio adjusted automatically by havingthe system re-weight or add cash, or leverage, when the investor adjuststhe pointers, dials or colors. The scales, etc. can all be adjusted tomake the presentation easier to see for different portfolios.

As shown in screen B, Common stock in company A 57 c has a risk relativeto the S&P 500 of 0.9 (which is blue on the color coded litmus testexample) 55 c, it represents 5% of the total value of the portfolio, andits differential return with respect to the S&P 500 is negative 15% 56c, which is also depicted in blue. Each of the remaining stocks isrepresented in a similar manner. In this example, the stocks are listedin alphabetical order, however, they could be ordered in a differentmanner depending on an investor preference selection. For example, theinvestor could adjust the ordering to depict the stocks in order oftotal value of the portfolio, from low to high risk or vice versa, etc.

In any of these instances, the securities that can be viewed as anintegrated, single portfolio for the investor can be any securities,including funds or other investments, the investor inputs into thesystem. Consequently, if the investor has a variety of accounts thatmust be maintained as legally disparate and separate accounts, then theinvestor can still view each of them together as a single integratedaccount for purposes of analysis and trade execution by having thesystem include whatever accounts and the securities or other investmentscontained therein as a single account that the investor desires(likewise, the investor can exclude any securities or other investmentshe wishes from being included in an account for purposes of analysis ortrade execution). In this manner, the investor is provided the benefitof being able to integrate easily all his holdings and understand andmanage all his accounts even though they must be maintained in legallyseparate accounts. Therefore, for the first time, an investor that hassecurities in a 401(k), an IRA and a separate trading account, and whohas securities for an account of his children, can view all the holdingsas a single integrated whole and manage them to obtain the benefits ofportfolio theory including to ensure proper levels of diversification,sector exposure, concentration levels, overall risk, etc. The investorwould do this merely by noting the accounts, or the securities or otherinvestments within accounts, to be grouped together for purposes ofacting as a single portfolio. As noted, this aspect of the presentinvention could also be used for similar analyses regarding othersecurities for which risk—return information is available, such as andprimarily, mutual funds.

Referring to FIG. 15, the natural language investor interaction with thepresent invention is illustrated. The system comprises a naturallanguage interface 151, one possible embodiment of which is a softwareprogram residing on the investor's PC or in the alternative on theserver associated with the present invention. Other possible embodimentscould be hardware implemented modules for interfacing to the investor'sPC. The investor can input selection criteria in natural language via akeyboard 152 or if desired via a speech processor 153 which recognizesthe spoken word and provides that translation to the natural languageinterface 151.

After interpretation of the investor's input, the natural languageinterface 151 provides portfolio and/or securities characteristics 154to the system. These portfolio and/or securities characteristics are thetranslation of the investor's desires for a portfolio and/or securityinto technical terms used more commonly by the investment community todescribe portfolios and/or securities.

An alternative input to the system is via a series of canned queries 155that are displayed on an investor's screen. An example of a canned querymight be “I want to invest in stocks that give me a portfolio like themarket” or “I want to invest in stocks that are big companies.” When aninvestor clicks on this choice, a series of portfolio and/or securitiescharacteristics 154 are automatically generated for subsequent use bythe system of the present invention.

If the investor has specified portfolio characteristics, the flow wouldproceed to the stock selection mechanism 157 to access information in asecurities database 158 which comprises all manner of securities withtheir associated characteristics. If the investor has specified certainsecurities characteristics, they are inputted to a file ofcharacteristics 156 which describes the various investment objectives ofan individual. For example, an investor may wish to invest in long termand potentially high yield stocks. The portfolio characteristicgenerator 156 can then generate a series of rules to be used to selectstocks. This rule based stock selection 157 then accesses information inthe securities database 158. Once stocks are selected, they can beoutput 159 in a variety of ways. For example, the results can bedisplayed on an investor's screen, hard copy output can be provided tothe investor, or an electronic file can be sent to the investor forstorage and later access.

In this fashion a relatively unsophisticated investor can make desiresfor securities known in natural language terms yet still use all of thesophistication of the present invention.

Referring to FIG. 16 the concept of affinity group investing is shown.The present invention first collects investor demographic informationfrom each of a plurality of investors 161. That information is sent to,and aggregated by, a generalized demographic database 162 which resideswithin the overall investor database 163. As mentioned earlier, all ofthe information in this investor database is generalized so that theprivacy of individual investors is maintained. The main purpose of theinvestor database 162 is to allow subsequent analysis of investor trendsand behaviors to be made.

In a similar fashion to the collection of demographic information,individual investor security investments and portfolio characteristicsare also collected 164. The specific securities invested in by and/orportfolio characteristics of a given investor are then sent to, andaggregated by, a generalized securities and portfolio characteristicsdata base 165. This database associates the investments made byparticular groups of investors.

When an investor desires to enter an affinity group or to see screensbased on group or investor characteristics or do collaborativeinvesting, the investor accesses, via a PC or from a server a series ofaffinity group selection criteria 166. Such criteria might beprofession, annual family earnings, education level, geographic area,and other demographic characteristics. The criteria selected to create aparticular affinity group, is then presented to the investor database163. The affinity group characteristics are retrieved from thegeneralized demographic database 162 and associated with the particularportfolio or securities selected from the generalizedsecurities/portfolio database 165. This information is then used tocreate (depending on what the investor requested) a securities and/orportfolio profile 167 of the particular affinity group. Thissecurities/portfolio profile can then be output 168 to the investor.Alternatively, the securities profile 167 can be input to the securitiesand portfolio database 169 of the present invention so that performanceoutput 170 can be presented to the investor showing how the securitiesinvested in by the particular affinity group actually performed, and canalso be presented to the system for execution or inclusion in theinvestor's portfolio 171. (In a similar manner, any other portfolio thatthe investor may generate through any of the other means describedherein could also be run through the securities/portfolio database 169and be outputted 170 to the investor showing how the portfolio soselected actually performed.)

In this manner an investor can be quite specific about an affinity groupthat the investor wishes to create and identify the performance ofsecurities and portfolios invested in by that particular group.

In a similar fashion to the affinity investing in individual securitiesas part of or separate from a portfolio as described above the presentinvention allows for affinity investing with respect to mutual funds orother instruments as well. In this instance, the investor desires toknow what mutual finds a particular group has invested in as a basis formaking future investment judgments. Again not only can such affinitygroup mutual fund investing be determined from the investor database,but the performance of the affinity group's investment can also bedetermined.

Additionally, if a group of investors so desire, the investors can allprovide information to the system so that other investors who theypermit or who are in their same group can have access to the overallportfolio of the group as a whole—either for monitoring purposes or foranalysis or for trade execution. In such instance the system wouldidentify the group as a separate group within the general demographicdatabase 163, and access to the portfolio and securities maintained bythe group or the leaders of the group (2) would be permitted to membersof the group.

As noted, there will also be pre-packaged or suggested portfolios. Thepresent invention will keep track of those portfolios. For example, theWashingtonian picks can be displayed for an investor who can then begiven the option to purchase a basket of securities that are the same asthe expert's picks that have been published. The Dow 500 and the Fortune500 top stocks may also be tracked by the present invention with theopportunity given to invest in the same top stocks as listed in theindex or the magazine. Again, performance data on the stocks andportfolios that are potential candidates for investment can be generatedto further inform the investor.

It is important to note that while the capabilities of the presentinvention to trade in stock and mutual funds has been discussed, thesystem and method of the present invention is equally well suited to anytradeable security where economies of scale are of importance. Thusfutures, options, bonds and other negotiable securities can equally bethe subject of trading with the present invention.

An Exemplary Embodiment of the Computer-based System of the PresentInvention

FIG. 14 depicts an exemplary embodiment of the overall system accordingto the computer-based system of the present invention. Within thecomputer-based system of the present invention is a server 62, whichexecutes a program B, which controls the operation of the entire system.While another program may execute on the investor's PC 63, program A,the investor's program can be completely performed by program B.Alternatively, these two programs A and B can work together likePointcast, or other similar programs, which download data to aninvestor's terminal and display this data via a graphical investorinterface based on “filter” selections made by the investor. Thus, onepossibility for program A is that it is merely a communication programthat enables the investor to establish a link to the server 62, and set“filters,” which determine what data is sent back and forth to theinvestor. In this case, the so-called filters consist of the stocks inthe investor's portfolio and the investor's risk model, etc. Onceestablished by the investor, the program B then performs all of theanalysis and computation required to advise the investor as to thelevels of risk and differential return inherent in the investor'sportfolio relative to known standards. This enables tight configurationcontrol on the investor software, which makes upgrading and securityprotection easier.

Alternatively, by placing more of the investor's program functionalityin program A, the amount of time the server 62 is accessed by theinvestor is minimal, thereby enabling a cost reduction in the totalamount of communication links required at the server 62. In thisembodiment, the investor would only access the server to receive thedata regarding the investor's stocks and to pass on new orders once theinvestor determined a new order. The total time accessing the serverwould be similar in this case to accessing one's electronic mail. Thus,there is much flexibility in creating the levels of functionality in thetwo main programs A and B.

In addition, the investor can access the server 62 via severalcommunication links. First, the investor can access the server 62 viathe Internet 64 using the investor's Internet Service Provider (ISP),which ultimately connects the investor's PC 63 to the server 62.

Second, the investor can access the server directly using a dial-upmodem connection. This has the advantage of security in that manyconsider a telephone connection inherently more secure than an openconnection over the Internet.

Third, the investor can access the server 62 using an intermediary,which provides the service to the investor, such as a bank, brokerage,etc. In this case, the investor either accesses the intermediary 65using a dial-up modem, or via the Internet 64. Once the investoraccesses the intermediary 65, the intermediary 65 then accesses theserver 62 using either an Internet connection or a dial-up connection.

The computer-based system of the present invention also provides for anelectronic payment mechanism 66 to enable the investor to make paymentsor transfer funds for investment or otherwise on a periodic basis, suchas monthly, biweekly, etc. This would enable an investor to match hisinvestments with his regular salary. The electronic payment mechanism 66includes an electronic withdrawal from the investor's checking/savingsaccount, a payroll deduction, a credit card transaction, etc.

An electronic connection to a third party trading system 67 is alsoprovided, which enables the program to make the trades electronically.Typically, these electronic trading systems 67 include a connection to aclearinghouse 68 for settlement of the trades. While not part of thepresent invention, this is shown for completeness.

All of these communications links are standard and known communicationslinks, hence no further discussion is necessary. In addition, the thirdparty electronic payment system connection consists of one of the manyknown ways of making this payment electronically, so no furtherdiscussion is required either. Finally, the third party trading systemcould consist of a known trading system, such as the OptiMark™ tradingsystem, or other trading system that communicates using the FinancialInformation eXchange (FIX) protocol, hence no additional discussion isrequired.

Operation of the Computer-based System of the Present Invention

The computer-based system of the present invention is designed toprovide a mechanism for a whole new financial investing system thatcurrently does not exist. It allows investors, with expert assistance,to create, manage and modify a complex portfolio that reflects theinvestor's own preferences. It allows the investor to ensure that hisportfolio is diversified and that it reflects the level of risk hewishes to assume. The computer-based system of the present inventionalso increases the investor's control over matters like what stocks heowns, the taxes he pays, and how his shares will be voted. And itpermits him to purchase and sell whole portfolios and specificsecurities, and fractional interests in shares of securities—all for alow cost that is less than or competitive to trades of single securitiesthrough discount brokers or having an interest in mutual funds.

Investors (“Users” in FIG. 6) access a server that processes theinformation necessary to enable the investor to create or modify aportfolio in accordance with the computer-based system of the presentinvention. This access is either through the Internet, through a dial-upmodem connection or through an intermediary such as a bank or brokeragethat is making the invention available to investors.

Investors first accessing the system are provided a range of securitymeasures to accommodate their own computer systems and their ownconcerns. For example, secure encrypted access will be supported forthose investors who have it as part of their Internet browsingcapability. Dial-up modem could also be available, for those who wishnot to rely on the Internet, or investors could also access the systemthrough an intermediary that possesses its own security controls and hasa secure link to the invention processing site, such as a broker orbank.

In addition, security may be effected through a dial-back or dial-upmechanism. Investors accessing the system over the Internet for thefirst time will be provided a password and log-on identification withouthaving to provide any confidential information, such as credit cardinformation, to the processing site. The site will then call theinvestor back at a number supplied by the investor, or the investor canaccess the site through a direct telephone call. The investor can thensupply the processing site with the necessary information by touch-toneinput of the site assigned password and the investor's confidentialcredit card information. Once the site has the credit card informationthrough direct telephone connection, it need not be provided to the siteagain and the investor then uses the investor-site-specific password andlog-on identification for communications. Those passwords and log-onswill be useless for any purpose other than communication with the site,and the credit card information never travels on the Internet.

Once the investor accesses the site though whatever means, initialscreens solicit vital information about the investor, such as range ofincome, other investments, age, financial responsibilities and financialgoals and liabilities.

Investors are then provided information that solicits their preferencesas to “risk” and “diversification.” Their responses provide theinvention the information it needs for its algorithms to work properly.

Based on this information, the invention suggests a general investmentasset allocation that the investor can modify. Such asset allocationmodels are relatively standard and in current use. However, the standardmodels can be adjusted by the investor for use in the system to allowthe investor to incur additional risk in order to achieve a higherreturn. The reason for permitting a higher risk-return level than normalis because the investor will be provided the opportunity through theinvention to fine-tune—and monitor and maintain—the level of risk (basedon a stock's historical volatility) selected by the investor for theinvestor's portfolio.

This fine tuning of portfolio risk will be far more than wouldordinarily be the case, for example, for an investor attempting toselect a mutual fund, because the investor utilizing the invention isable to ensure that the selected investments and their risk profileremain subject to the investor's control. In a mutual fund (other thanpassive or “non-managed” funds), the investor has no assurance as towhat stocks, and what weighting of stocks, will be included in the fundin the future, or how much of the fund will be held in cash, andtherefore no assurance that the fund will not modify its style and“risk” without the investor having advance knowledge of the change. Evenin passive funds there is uncertainty as to how much of the fund is heldin cash at any one time. Consequently, the mutual fund investor incursthe additional risk of the uncertainty as to a mutual fund's riskprofile, thereby increasing the investor's level of risk without theinvestor obtaining any benefit.

Once the general asset allocation determinations and risk-returnpreferences are made, investors are asked, through simple screens, aboutany preferences they have regarding stocks, such as where securities arelisted, capitalization, and business sector; various financial factorssuch as price/earnings ratio and growth trends, and corporate governancefactors such as whether the company sells specified products, or enjoysgood labor relations, etc. (Determinations regarding subjectivecriteria, such as whether a company has “good” or “bad” governancefactors, would generally come from third party sources.)

An investor could then specify specific stocks-that must, or must not,be included in the portfolio. Consequently, the invention also acts asan ordinary broker—with a very low cost that would be expected to bematerially less than even deep discount brokers—when immediate executionis not required or if the system operator is willing to pre-aggregatecertain trades.

If an investor seeks immediate execution for a selected trade, theinvention will provide it, in the same manner as would any otherelectronic discount brokerage, for a fee that would be competitive withor better than that charged by the reputable discount brokers.

After preferences are entered, the invention will create a diversifiedportfolio that expertly matches, to the extent possible, thosepreferences and the asset allocation determination—all automatically.

If the portfolio is acceptable, the investor will enter the dollaramount to be invested and the securities will be purchased for theinvestor at the invention's next “transaction window”.

For the invention to work, costs must be kept low so that investors canpurchase and modify whole portfolios of securities on a frequent basis.To accomplish this, under one embodiment of the invention, the inventionaggregates the orders entered by the investors utilizing the invention.The orders are aggregated not for the purpose of attempting to match oneinvestor's order against another investor's order, but to reduce thenumber of actual transactions required to be executed by the system. Thenumber of aggregations will depend on the number of investors of thesystem, their usage and other factors, but it is currently contemplatedthat orders would be aggregated into those received when the market isclosed, those received in the morning, and those received in theafternoon, with transactions effected at the market open, mid-day and atthe market close. If demand warrants, and other factors make itpermissible, transactions could also be effected at other times—such asin the evening or more frequently during the day, if there is a marketfrom which prices can be derived or if there is a market maker willingto make a market at that time and if it appears that effecting atransaction at such time would be consistent with the interests ofinvestors. Similarly, the system operator (a bank or a broker, forexample), could “pre-aggregate” some orders by executing against itselfas principal and then hold the orders until a transaction window oruntil a certain amount was reached, etc. in order to execute thepre-aggregated orders. For example, the operator could take ten ordersfrom ten customers and pre-aggregate all of them by executing againstitself as those orders are received, and then take the bulk orderposition that it now owns and execute that as another order. Thisstrategy means that the operator has to take upon itself market risk,and also has certain other disadvantages including potentially having totreat each trade as a reportable order for reporting purposes and otherrequirements, but it may be viable for certain small orders.

Shares can be bought in very, small odd lots (one or two shares), andeven in fractions—purchases not possible on a cost-effective basis withordinary brokerage.

All investor actions can be automated, with specified amounts beingadded each week or month from direct deposits and with selected stockssold or bought depending on whether they satisfy certain criteria.

In subsequent sessions, the investor can modify his portfolio any way hewishes, including to reflect new preferences, add to it with additionaldollars invested, or sell some or all of the securities in theportfolio.

The investor can also have the portfolio analyzed in connection withother investments the investor may have, such as funds or otherinvestments held in other accounts, to review and modify a wholeintegrated portfolio.

The invention will track the tax “basis” and acquisition date in stockpurchases, and which stocks have gains and which have losses: so aninvestor can choose to sell stocks to generate capital gains or losses(long or short term) and thereby manage tax effects.

Moreover, because the investor actually owns the individual securitiesin the portfolio, instead of just an interest in a fund, the investorhas the right to vote the underlying stocks (or delegate the voting inaccordance with various instructions), and sell individual stocks whenhe wishes.

The computer-based system of the present invention, therefore, providescomplete “hands on” portfolio management for the investor who wishesit—those who employ discount brokerage, and those who select mutualfunds on their own and simple, automatic and expert management for aninvestor who wishes to be completely “taken care of”.

The strengths and advantages of the invention include relative to mutualfunds:

the selection of individual securities to be included in a portfolio;

management of and clearly superior tax effects;

the ability to make specific modifications to the portfolio at leastthree times a day, including the ability to buy and sell securities as ablock at the open, mid-day or close instead of just at the next close asis the case with mutual funds;

the inclusion of world class securities or selection by sector,price/earnings ratio, governance policies, industry or other factors tosuit investors' preferences at levels not available in mutual funds;

the ability to exercise voting and other shareholder and corporategovernance rights and decisions—such as whether to tender securities ina takeover;

the ability to control selectively reinvestment of dividends;

the ability to fine-tune risk-return preferences with complete controlover what will be included in the portfolio and whether there will be achange in investment strategy;

the ability to modify risk levels and portfolios with fewer potentialcosts or tax consequences;

the ability to view multiple investments more easily as fully integratedportfolio and manage it as such; and

the ability to manage costs better.

Those strengths and advantages relative to discount brokerages include:

inexpensive and cost-effective manner of creating a diversifiedportfolio;

ability to acquire small odd lots and fractional shares in multiplesecurities at reasonable costs;

far less cost in purchasing and selling individual securities (assumingimmediate execution is not required)—as compared even to the deepestdiscount brokers;

ability to establish portfolio wide limitations and parameters such asrequired diversification of a portfolio and maximum risk levels;

monitoring of portfolio based-tax effects;

assistance in defining diversification and selection of stocks thatsatisfy diversification goals;

assistance in defining other factors and investor preferences andselection of stocks that satisfy those other preferences and goals; and

a likelihood of obtaining better execution than can be obtained throughdiscount brokers due to matching of trades.

One exemplary embodiment of the present invention is for use inself-managed 401(k) accounts. By placing certain restrictions on therisk levels and a minimum number of assets/liabilities, the system canoperate as a self-managed 401(k). For example, an employer may want topermit its employees to manage their own accounts, without incurringcosts to the employer. So, once the plan is established, the individualaccounts are billed a relatively low monthly fee (or small asset basedfee) for enabling the user to be a self-managed account. But to protectthe employer, the accounts would have certain restrictions placed onthem so that an employee cannot invest all of his account into a singlestock, for example, or create a portfolio with extremely high risklevels. The program can be set up to prevent execution of trades thatviolate these base parameters, and inform the user of the reason fornon-execution.

Another exemplary embodiment of the present invention is for use by anexisting brokerage company that permits its investors/customers tocreate a portfolio, as described above, and trade that portfolio via thebrokerage company. Once the portfolios reach the central computer, theyare broken down into their constituent trades. At this point, there areseveral possibilities. One, the trades can be aggregated, and nettedagainst one another, leaving only a small number of shares to either bepurchased or sold for each asset/liability. In this case, the brokeragecompany can undertake the risk that the stock will go up or down andsimply reallocate the ownership of the stocks within the company andthen at the end of the day (or several times throughout the day) executea trade to remove any risk. Two, the trades can be continuously executedas they arrive, thereby reducing any risk. In this case, the investorsare still investing portfolio's, but the company is handling theunderlying transactions to implement the desired portfolios. Third, thetrades can simply be aggregated until reaching a certain size (either indollars or numbers of share), at which point they are executed.

Other Applications

The computer-based system of the present invention can be used byordinary investors to manage other “things” such as options andcommodities trading, bonds, foreign equities, or used for investmentbanking for the trading of, for example, derivatives. The computer-basedsystem of the present invention can be used to establish a system tocreate and manage a portfolio of any assets or liabilities orcombination thereof that can be traded, and provides benefits wheneverdiversification or utilization of portfolio concepts is an advantage (aswould be the case with most financial assets). For example, as describedabove the invention could be used for any security, including foreign ordomestic equities, options, warrants, bonds, notes, limited partnershipinterests, private placement securities or otherwise. In addition, theinvention could be used for commodities, futures, bank loan syndicationinterests and novel assets or liabilities that are traded such aspollution rights (including global warming and air/water pollutionrights) or insurance claim interests. The method of: 1) obtainingpreferences for portfolio characteristics of investors; 2) employingthose preferences to describe and select items to be transacted; 3)analyzing and transacting on such assets as a portfolio as opposed to asseparate assets; 4) aggregating such transactions over an applicablecharacteristic, such as a time period (for example, every three hours)or a time certain (for example, at 9:30 am, 12:30 pm and 4:30 pm) or anamount (for example, having 1,000 transactions, or transactions totaling$5,000, aggregated) or otherwise; and 5) executing the transactions asaggregated and, if applicable, netted, transactions can be applied toany of these items.

In addition, obtaining investor risk preferences and other informationallows for appropriately focused private placement.and otheropportunities to be presented to investors.

Furthermore, the present invention makes possible the diversificationfor smaller investors that venture capitalists obtain in privateplacement investment by investing in multiple private placements. Forexample, most venture capitalists invest in multiple private placements,which are normally high risk/rate return investments. By investing inseveral, the venture capitalists are able to reduce their risk becausethe likelihood increases that one of the private placements will besuccessful, thereby offsetting losses in the others.

The present invention makes possible this same opportunity, but at alower scale, to smaller investors. For example, by enabling privateplacements to be listed as any other stock, the system enables theinvestor to select that private placement for investment. By selectingseveral of these, the investor can spread the risk across many of theseinvestments, thereby reducing the overall risk.

What is claimed is:
 1. A program encoded on a computer readable mediumfor executing on a computer, enabling an individual or smaller investorto create, manage and trade a portfolio of market tradable assets orliabilities, directly owned by the investor in a market for each of theassets or liabilities and for interfacing with a system for managing aplurality of individual or smaller investors' portfolios via a firstcommunication link over which the individual or smaller investortransmits to the system trading data regarding trades of at least oneasset or liability directly owned by the investor and that theindividual or smaller investor desires to make, said program comprising:a) a graphical investor interface prompting the individual or smallerinvestor for investor identification information, investor investmentinformation, including an amount to be invested and a payment method,and investor preference data; b) an asset allocation modeling processcreating a percentage allocation of assets for the individual or smallerinvestor based on the investor preference data, wherein the graphicalinvestor interface displays via the computer display a plurality ofassets or liabilities among which the individual or smaller investor canselect to create an individual or smaller investor portfolio containingassets or liabilities directly owned by the investor and commensuratewith the percentage allocation of assets; c) a risk and differentialreturn calculation process continuously calculating a risk and adifferential return of the entire individual or smaller investorportfolio relative to a standard industry measurement in response tochanges in the portfolio made by the individual or smaller investor, andproviding the relative risk and differential return to the graphicalinvestor interface, which displays the relative risk and differentialreturn to the individual or smaller investor, said risk and differentialreturn process allocating the investment amount across the entireindividual or smaller investor portfolio to identify trades of theassets or liabilities directly owned by the investor and contained inthe portfolio that are required to achieve the desired risk anddifferential return, wherein said trades include single shares, odd lotsand/or fractional shares of the assets or liabilities; d) a portfolioeditor process enabling the individual or smaller investor to modify theinvestor portfolio; e) a value at risk and sensitivity calculationprocess calculating a value at risk and a sensitivity return of theentire individual or smaller investor portfolio, and providing suchvalue and analysis to the graphical investor interface, which displaysthe value and analysis to the individual or smaller investor; and f) acommunication process communicating said investor identificationinformation along with any trades of market tradable assets orliabilities to be executed in a market for each of the assets orliabilities to create or modify an individual or smaller investor'sportfolio to ensure an individual or smaller investor's actual portfoliomatches an individual or smaller investor's desired portfolio to thesystem, and matching the parameters of any limitations imposed on theportfolio, as said trading data via the first communication link, saidtrading data including an order to trade the portfolio of assets orliabilities, said communication process communicating trades includingsingle shares, odd lots and/or fractional shares of said assets orliabilities to the system for managing a plurality of individual orsmaller investor's portfolios for aggregation of said single shares, oddlots and/or fractional shares with other investors' trades.
 2. Theprogram according to claim 1, further comprising an automatic assetallocation adjustment process utilizing additional preferenceinformation provided by the individual or smaller investor regardingrisk/return to re-adjust the asset allocation and to output a differentasset allocation based on the additional preference information.
 3. Theprogram according to claim 1, wherein the graphical investor interfacefurther comprises a routine that displays the relative risk anddifferential return as a color code.
 4. The program according to claim3, wherein the graphical investor interface further comprises a routinethat changes the asset allocation in response to investor changes to thecolor code display.
 5. The program according to claim 1, wherein thegraphical investor interface further comprises a routine that displaysthe relative risk and differential return as a numerical indicator. 6.The program according to claim 5, further comprising an automatic assetallocation adjustment process changing the asset allocation in responseto investor changes to the numerical indicator.
 7. The program accordingto claim 1, wherein the graphical investor interface further comprises aroutine that displays the relative risk and differential return as oneselected from the group of: an arrow on a dial, an arrow on a horizontalscale, and an arrow on a vertical scale.
 8. The program according toclaim 7, further comprising an automatic asset allocation adjustmentprocess changing the asset allocation in response to investor changes tothe location of the arrow on one selected from the group of: the dial,the horizontal scale, and the vertical scale.
 9. The program accordingto claim 1, wherein the graphical investor interface further comprises aroutine that displays the relative risk and differential return as anarrow on a range of numerical values.
 10. The program according to claim1, further comprising an automatic asset allocation adjustment processchanging the asset allocation in response to investor changes to thearrow on the range of numerical values.
 11. The program according toclaim 1, further comprising a configuration control process thatprovides a version number of the program to the system in response to arequest from the system, wherein the system automatically downloads anupdated version of the investor program upon detection of an out of dateversion.
 12. The program according to claim 1, wherein the portfolioeditor process further comprises a routine that accesses a databaselocated in the system storing a plurality of assets or liabilities, fromwhich the individual or smaller investor can select to create and modifythe portfolio of the individual or smaller investor.
 13. The programaccording to claim 1, wherein the portfolio editor process furthercomprises a default portfolio process providing a default portfolio tothe individual or smaller investor based on a selection of a type ofportfolio by the individual or smaller investor.
 14. The programaccording to claim 13, wherein the type of portfolio includes at leastone selected from the group consisting of: Dow Jones 30 index, S&P 500index and Russell
 2000. 15. The program according to claim 13, whereinthe default portfolio process creates a portfolio that reflects similarrisk/return characteristics to one selected from the group consistingof: the Dow Jones 30 index, the S&P 500 index and the Russell 2000index.
 16. The program according to claim 1, wherein the portfolioeditor process provides a list of assets or liabilities chosen by aninvestor specifiable group.
 17. The program, according to claim 16,wherein the investor specifiable group includes at least one selectedfrom the group consisting of: lawyers, stockbrokers, engineers,accountants, farmers, writers, managers and union leaders.
 18. Theprogram according to claim 1, further comprising a natural languageinterface process receiving input from the individual or smallerinvestor.
 19. The program according to claim 1, further comprising anaffinity group creation process creating an affinity group comprising aplurality of individuals having similar characteristics, thecharacteristics being selectable by the investor, said affinity groupcreation process determining what assets or liabilities have beenpurchased by the affinity group, and executing a purchase of the assetsor liabilities that have been purchased by the affinity group.
 20. Amethod using aggregation for creating and managing a portfolio of markettradable assets or liabilities, comprising the steps of: obtaining aplurality of investor preferences for characteristics of a plurality ofdistinct assets or liabilities for the portfolio of an investor;employing the plurality of investor preferences to select a plurality ofdistinct market tradable assets or liabilities to be owned directly bythe investor and to be transacted in a market for each of the assets orliabilities in a plurality of transactions for the investor; aggregatingthe plurality of transactions of the investor with a plurality oftransactions of a plurality of other investors over an applicablecharacteristic of the plurality of assets or liabilities, wherein saidaggregating includes aggregating single shares, odd lots and/orfractional shares using a computer; and placing one or more trades basedon said aggregating, wherein the selected plurality of distinct markettradable assets or liabilities are owned directly by the investor in theinvestor's portfolio as a result of said one or more trades.
 21. Themethod according to claim 20, wherein the step of aggregating theplurality of transactions comprises the step of aggregating theplurality of transactions over a time period.
 22. The method accordingto claim 21, wherein the time period includes every three hours.
 23. Themethod according to claim 20, wherein aggregating the plurality oftransactions comprises aggregating once per day at a time certain. 24.The method according to claim 20, wherein aggregating the plurality oftransactions comprises aggregating a plurality of times per day at aplurality of predetermined times.
 25. The method according to claim 20,wherein aggregating the plurality of transactions comprises aggregatingover an amount, in terms of dollars or number, of transactions.
 26. Themethod according to claim 20, further comprising the step of executingthe plurality of transactions as aggregated.
 27. The method according toclaim 20, further comprising the step of netting buy orders against sellorders within the plurality of transactions of the investor and theplurality of other investors to obtain either a single buy order or asingle sell order for at least one of the assets or liabilities afteraggregating the plurality of transactions, and executing either thesingle buy order or the single sell order.
 28. The method according toclaim 20, further comprising the steps of: creating an affinity groupcomprising individuals having similar characteristics, thecharacteristics being selectable by the investor; determining whatassets or liabilities have been transacted by the affinity group; andexecuting similar transactions for the investor in the assets orliabilities that have been transacted by the affinity group.
 29. Themethod according to claim 28, wherein the step of determining whatassets or liabilities have been transacted further comprises the stepsof: soliciting demographic information from a plurality of investorscomprising characteristics of the plurality of investors; solicitinginformation relating to what assets or liabilities have been transactedby each of the plurality of investors; storing the demographicinformation in a searchable database of demographic information; storingthe transacted information in the searchable database; and associatingthe stored transacted information with the stored demographicinformation.
 30. The method according to claim 29, further comprisingthe step of: creating a historical performance output for the investorconcerning the performance of the assets or liabilities of the affinitygroup.
 31. The method according to claim 20, further comprising the stepof displaying on a graphical investor interface relative risk anddifferential return as one selected from the group consisting of: acolor code, a numerical indicator, an arrow on a dial, an arrow on ahorizontal scale, and an arrow on a vertical scale.
 32. The methodaccording to claim 20, further comprising the step of displaying on agraphical investor interface relative risk and differential return as anarrow on a range of numerical values.
 33. The method according to claim31, further comprising the step of changing the portfoliocharacteristics in response to the investor changing one selected fromthe group of: the color code, the numerical indicator, the location ofthe arrow on the dial, the location of the arrow on the horizontalscale, and the location of the arrow on vertical scale.
 34. The methodaccording to claim 30, further comprising the step of changing theportfolio characteristics in response to the investor changing thelocation of the arrow on the range of numerical values.
 35. The methodaccording to claim 20, further comprising: a) receiving data from eachinvestor of the plurality of other investors regarding an amount ofmoney to be invested in a portfolio for each respective investor for apredetermined period, and accessing an electronic payment system uponreceiving instructions from said each investor to purchase said eachrespective portfolio of assets or liabilities to obtain payment for therequired purchases; b) enabling said each investor to create and managesaid each respective portfolio of assets or liabilities directly ownedby the respective investor by displaying a list of assets or liabilitiesfrom which said each investor can select to be in the portfolio; c)receiving commands to trade said each respective portfolio of assets orliabilities directly owned by the respective investor, and sendingtrading orders to an electronic trading system for execution inaccordance with the commands; and d) storing said each investor'sportfolio.
 36. The method according to claim 35, wherein aggregating theplurality of transactions comprises aggregating all investors' tradesand sending the aggregated trades as a single trade in each asset orliability to a trading system.
 37. The method according to claim 36,further comprising netting buy orders against sell orders before sendingthe aggregated trades to the trading system.
 38. The method according toclaim 20, further comprising presenting to the investor at least oneinput screen comprising structured questions in non-technical financialterms for interaction with the investor.
 39. The method according toclaim 20, wherein the plurality of transactions include an order totrade at least one of the assets or liabilities in a specified dollaramount.
 40. The method according to claim 20, further comprisingallocating a total dollar amount being invested by the investor among aplurality of assets or liabilities meeting a criteria entered by theinvestor by allocating to each of the plurality of assets or liabilitiesone of equal dollar amounts and capitalization-weighted dollar amounts.41. The method according to claim 20, wherein the plurality oftransactions include an order to trade at least one of the assets orliabilities according to a periodic monetary contribution to theinvestor portfolio.
 42. The method according to claim 41, wherein theperiodic monetary contribution includes one or more of the following: aweekly contribution, a monthly contribution and an annual contribution.43. The method according to claim 41, further comprising calculating anumber of assets or liabilities to be purchased by dividing the periodicmonetary contribution by a current purchase price of a whole share of atleast one of the assets or liabilities.
 44. The method according toclaim 20, wherein the plurality of transactions include an order totrade in a dollar amount of assets or liabilities and a share amount ofassets or liabilities.
 45. The method according to claim 20, whereinaggregating single shares, odd lots and/or fractional shares comprisesgenerating a single buy order and/or a single sell order for at leastone of the assets or liabilities.
 46. The method according to claim 20,wherein said investor preferences include input to an asset allocationmodel and further comprising creating a resulting percentage allocationof investment classes for the investor based on said asset allocationmodel input.
 47. The method according to claim 20, further comprisingtransmitting a request for an electronic payment for the investor to athird party payment system, and receiving, in response to said request,electronic payment data for the investor electronically from the thirdparty payment system.
 48. The method according to claim 47, furthercomprising maintaining a payment account for the investor.
 49. Themethod according to claim 48, further comprising permitting trading ofthe assets or liabilities for the investor only if the investor'spayment account contains at least a predetermined monetary amount. 50.The method according to claim 45, further comprising transmitting thesingle buy order and/or the single sell order to an electronic tradingsystem for execution.
 51. The method according to claim 20, furthercomprising prompting the investor for investor identificationinformation and investor preferences, transmitting said investoridentification and investor preferences to a processor, and enabling theinvestor to interact with the processor to select a plurality of assetsor liabilities to create an investor portfolio commensurate with apercentage allocation of investment assets, and to have parameters andlimitations established as to portfolio characteristics that will bepermitted for the investor.
 52. The method according to claim 20,further comprising creating or modifying the investor's portfolio toensure the investor's actual portfolio matches the investor's desiredportfolio in accordance with the investor's preferences.
 53. The methodaccording to claim 20, further comprising receiving an order to trade byat least the investor or one of the plurality of other investors afractional share of at least one of the assets or liabilities.
 54. Themethod according to claim 20, further comprising receiving an order totrade by at least the investor or one of the plurality of otherinvestors an odd lot of shares for at least one of the assets orliabilities.
 55. The method according to claim 20, further comprisingreceiving an order to trade by at least the investor or one of theplurality of other investors a small number of shares for at least oneof the assets or liabilities.
 56. The method according to claim 20,further comprising maintaining a tax basis and date of acquisition forall of the assets or liabilities traded by the investor.
 57. The methodaccording to claim 20, further comprising providing information to theinvestor regarding voting rights of the assets or liabilities held bythe investor.
 58. The method according to claim 45, further comprisingreceiving actual trading pricing information regarding the single buyorder and/or the single sell order for at least one of the assets orliabilities.
 59. The method according to claim 58, further comprisingtransmitting to the investor actual trading pricing informationregarding each asset or liability traded by the investor.
 60. The methodaccording to claim 58, further comprising modifying a display of riskand differential return of the investor portfolio in accordance with theactual trading pricing information for at least one of the assets orliabilities traded by the investor.
 61. The method according to claim58, further comprising recommending modifications to the investorportfolio to the investor via a graphical user interface to make theinvestor portfolio match a percentage allocation previously determinedif the investor portfolio no longer matches the percentage allocation asa result of the actual trading pricing information received.
 62. Themethod according to claim 20, further comprising displaying a graphicaluser interface on a predetermined world wide web site via which theinvestor can provide investor identification information.
 63. The methodaccording to claims 20, further comprising creating an affinity groupcomprising individuals having similar characteristics, the similarcharacteristics being selectable by the investor, determining whatassets or liabilities have been traded by the affinity group, andexecuting a trade of those assets or liabilities that have been tradedby the affinity group on behalf of the investor.
 64. The methodaccording to claim 63, further comprising soliciting demographicinformation from a plurality of other investors comprisingcharacteristics of the plurality of other investors, said solicitingincluding: (i) soliciting information relating to what assets orliabilities have been traded by each of the plurality of otherinvestors, (ii) storing the demographic information in a searchabledatabase of demographic information, (iii) storing the traded assets orliabilities information in the searchable database; and (iv) associatingthe stored assets or liabilities information with the stored demographicinformation.
 65. The method according to claim 20, wherein the employingcomprises providing a default portfolio to the investor based on aselection of a type of portfolio by the investor.
 66. The methodaccording to claim 65, wherein the type of portfolio includes at leastone selected from the group consisting of: Dow Jones 30 index, S&P 500index and Russell
 2000. 67. The method according to claim 20, whereinthe employing comprises creating a portfolio that reflects similarrisk/return characteristics to one selected from the group consistingof: the Dow Jones 30 index, the S&P 500 index and the Russell 2000index.
 68. The method according to claim 20, further comprisingproviding to the investor a list of assets or liabilities chosen by aninvestor specifiable group.
 69. The method according to claim 68,wherein the investor specifiable group includes at least one selectedfrom the group consisting of: lawyers, stockbrokers, engineers,accountants, farmers, writers, managers and union leaders.
 70. Themethod according to claim 20, further comprising prompting the investorfor investor identification information, investor investmentinformation, including an amount to be invested and a payment method,and investor preferences.
 71. The method according to claim 20, furthercomprising creating a percentage allocation of assets for the investorbased on the investor preferences and displaying a plurality of assetsor liabilities among which the investor can select to create theinvestor portfolio containing assets or liabilities commensurate withthe percentage allocation of assets.
 72. The method according to claim20, further comprising continuously calculating a risk and adifferential return of the entire investor portfolio relative to astandard industry measurement in response to changes in the investorportfolio made by the investor.
 73. The method according to claim 72,further comprising displaying the relative risk and differential returnto the investor, allocating an investment amount across the entireinvestor portfolio to identify trades of the assets or liabilities to beowned or currently owned by the investor and included in the investorportfolio that are required to achieve the desired risk and differentialreturn.
 74. The method according to claim 20, wherein the employingcomprises providing a list of market tradable assets or liabilities tothe investor and enabling the investor to select one or more assets orliabilities from the list to create the investor portfolio.
 75. Themethod according to claim 20, wherein the employing comprises providingone or more pre-packaged groups of assets or liabilities to the investorand enabling the investor to select one or more of the pre-packagedgroups to create the investor portfolio.
 76. The method according toclaim 20, wherein the obtaining comprises receiving investor preferencesfor portfolio characteristics of an investor, and the employingcomprises using the portfolio characteristics to create the investorportfolio.
 77. The method according to claim 20, wherein the employingcomprises screening based on the investor preferences a plurality ofassets or liabilities available for selection by the investor, providingto the investor a list assets or liabilities that satisfy the screeningand enabling the investor to select one or more of the assets orliabilities from the list to create the investor portfolio.
 78. Themethod according to claim 77, wherein the screening comprises includingor excluding assets or liabilities according to at least one of: a typeof an asset or liability, a price of an asset or liability, a risk of anasset or liability, a geographic sector of an asset or liability, aproduct sector of an asset or liability, non-economic factors, socialconsiderations, moral considerations, and political considerations. 79.The method according to claim 20, wherein the obtaining comprisesreceiving the plurality of investor preferences from at least one of: amoney-manager and a financial planner.
 80. The method according to claim20, wherein the obtaining comprises receiving the plurality of investorpreferences from an agent acting on behalf of the investor.
 81. Theprogram according to claim 13, wherein the type of portfolio includes astock index or a subset of a stock index.
 82. The program according toclaim 13, wherein the default portfolio process creates a portfolio thatreflects similar risk/return characteristics to a stock index or asubset of a stock index.
 83. The program, according to claim 16, whereinthe investor specifiable group includes investor selected and approvedmembers.
 84. The method according to claim 65, wherein the type ofportfolio includes a stock index or a subset of a stock index.
 85. Themethod according to claim 20, wherein the employing comprises creating aportfolio that reflects similar risk/return characteristics to a stockindex or a subset of a stock index.
 86. The method according to claim68, wherein the investor specifiable group includes investor selectedand approved members.